Buying your first home in the next year or so? Prepare yourself by knowing how much house you can comfortably afford. That will narrow your focus so you can house-hunt more effectively. Here are three steps to help you pinpoint how much house you can afford.

Step 1: Calculate an affordable mortgage

Use Genworth Canada’s What Can I Afford Calculator to figure out how much mortgage you can afford.

As an example, using the calculator’s affordability formula, the average Canadian homeowner might consider a surprisingly modest mortgage: $196,776, with monthly payments of $1,003.

The example above was calculated using Canadian averages and data typical to many first-time homebuyers:

  • An annual household income of $76,550 (Statistics Canada’s 2013 Canadian median)
  • Monthly debt payments of $1,165 (the Canadian average, according to a June 2015 poll by one of the major banks)
  • A 5-year mortgage rate of 3.7% (fairly standard for buyers with moderate credit and a down payment of 5% of the purchase price)
  • A 25-year amortization period (the maximum allowed on home purchases with down payments of less than 20% of the purchase price)
  • A monthly heating bill of about $125
  • No condo fees
  • An annual property tax of about $3,100 (Toronto’s approximate annual property tax on a home costing $440,000, the average price of a Canadian home in mid-2015)

Your real-world affordability may be lower if you have above-average debt, significant household expenses (daycare is a huge one for many young families), or if you’re self-employed and have unpredictable income.

Be honest about how much mortgage you can comfortably carry – an amount that leaves room for other expenses and potential lifestyle changes (i.e., children, education costs, caring for an aging parent, going back to school, buying another car and so on). Consider those factors to avoid overextending yourself on a barely affordable property.

Step 2: Figure out how much you can spend on a property

The next step is figuring out how much you can spend on your home.

Based on that typical mortgage of $196,776, your home could cost anywhere from $207,000 (with a 5% down payment of approximately $10,350) to considerably more. It all depends on how much you’ve saved for a down payment.

In many Canadian markets, $207,000 doesn’t buy much house. Clearly, one of the most important factors in buying the most house while maintaining affordability is making the largest possible down payment. (With $60,000 saved, for instance, you can afford a $257,000 house with that same $196,776 mortgage.)

Upshot: Work a second job if you can. Reduce your discretionary expenses. Scale back on your dream wedding. Borrow money from your registered retirement savings plan (RRSP) through the federal government’s Home Buyers’ Plan. Ask Mom and Dad for help.

According to Genworth Canada’s 2015 First-Time Homeownership Study, millennials (the largest age group of first-time homebuyers) are making responsible financial decisions before entering the Canadian housing market. In fact, 69% said they paid for their down payment with funds from their or their partner’s savings or non-registered investments, while 39% said they had made a withdrawal from their RRSP. Only 3% said the only way they could afford to buy their first home was with financial help from their parents or other family.

Step 3: Create a budget – and stick to it

Once you have a down payment savings goal, create a monthly budget, outlining what you’re paying now, so you can find ways to shave expenses.

Track your monthly bills and download a smartphone app like BUDGT (iPhone) or HomeBudget with Sync (iPhone, Android) to keep tabs on your daily spending. You may be shocked to discover that you spend $120 a month at coffee shops – while your mate spends $120 monthly on cab fare. That’s $2,880 per year that could be going toward your down payment!

Seeing your numbers in stark black and white provides motivation to save. Could you save $100 a month by swapping satellite TV for a streaming service? Could you save thousands of dollars a year by cooking more and eating out less?

Besides saving for your down payment, budgeting before you buy gets you into the habit, preparing you for homeownership costs like your mortgage, utilities, internet, property taxes, home insurance, condo/townhouse fees, emergency repairs, home improvements and so on.

Once you’re ready to enter the market, commit to buying within your means. Responsible homeownership sets you up for success so you can enjoy – and live comfortably in – your home sweet home.

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