Written By Rubina Ahmed-Haq.
Homeownership is a dream for many young people. It’s a signal that they’ve arrived at adulthood and they’re making big financial decisions to substantiate that. But if you’re single and thinking of buying a home on your own, the enormity of that situation can be overwhelming. That’s because many might think that home ownership without a partner is impossible. But the reality is, if you can afford to take care of your real estate purchase on your own and you’re following the same principles when calculating your affordability, homeownership for a single person is possible. Here’s what to consider before jumping in on your own.
When shopping for a home, it can be easy to start looking at places that are out of your budget. Before you even go house hunting, visit a bank to get pre-approved on your mortgage. Once you know how much the bank is willing to lend you and what you can afford, you can narrow your search with your true budget. Also use the pre-approval number as a guide, just because the bank is willing to lend you $500,000 doesn’t mean you have to take it. You may only need $400,000 for the home you want.
In Canada, you can buy a house with less than a 20 percent down payment. This does mean you will have to take Canada Mortgage and Housing Corporation (CMHC) insurance, which is an added cost. As a single person, it would be wise to put at least 20 percent down. That way, you can avoid the CMHC insurance and save more money . Also, you won’t be burdened with a large mortgage to pay down on your own. If you don’t have enough to put 20 percent down, start shopping for a less expensive home or wait and save more towards your down payment.
Stress test yourself
Once you know how much the bank is willing to lend you and how much of a down payment you have, stress test your financial situation. New guidelines introduced by Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, requires all new mortgages to be stress tested. Borrowers have to show they can afford to make their mortgage payments if rates were two percentage points higher than their contractual rate or at the Bank of Canada 5 year benchmark rate, whichever is greater. When buying solo, its best to stress test your loan even more. Add four percentage points to your contract mortgage rate. Could you afford to make payments if rates were to rise that much? This builds in that extra insurance you need since you’re buying on your own.
Calculate your monthly expenses
Owning a home is not just the mortgage payment, there are other costs you may underestimate. There are utility costs like hydro, gas and water. There are property taxes and insurance. But also the cost of maintenance. The general rule is to estimate your yearly maintenance cost will be equal to one per cent of the purchase price of the home. Best advice is to over-calculate these costs; what they would be at the top end? That will give you a more realistic picture of what it will cost to maintain your home on a month-to-month basis.
Buying on your own doesn’t mean you can’t find situations that will help you out financially. If you’re purchasing a house, consider options that already have a basement apartment to rent or one where it would be easy to set up. This can offset your costs. If you feel comfortable sharing common amenities with another person, you can also rent out a room in the home. Also, just because you don’t have a partner doesn’t mean you have to take this journey alone. Talk to your siblings, people in your family, and ask around your social circle. See if anyone is interested in a real estate investment opportunity with you. To fund that purchase you can use a group mortgage. These products are specifically set up to help several individuals wanting to buy the same property. These are also called co-mortgages and are more common in big cities like Toronto and Vancouver, where real estate prices are higher.
Have a 5-10-15 year plan
The home you’re buying today should suit your lifestyle for at least five years. That is typically the length of your mortgage contract. Think critically of where you see yourself in five years, go beyond that and think about the next 10 or 15 years. Moving is a huge expense, having to do so for one extra bedroom, or slightly more square footage, will be a hassle. Avoid all that by buying the house you need now and for the near future.
Always have an emergency plan as well, because if for some reason you lost your job, you wouldn’t have the support of another salary to rely on. In your emergency fund, make sure you have enough money to comfortably get you through three months at your current cost of living.
Finally, there are no roadblocks for a single person to buy a house. You just have to plan more carefully and be realistic about what you can afford.
Written by Rubina Ahmed-Haq is a Personal Finance Expert in Toronto and founder of alwayssavemoney.com. She has been broadcasting about saving, budgeting, investing for 17 years.
Illustration by Yana Vorontsov.