When you were a kid did you ever play house? Pretend what kind of place you’d live in, who you’d live with, and how many dogs you’d have? You probably pretended to make meals, do the cleaning, and solve arguments, but did you pretend to pay the bills? If you’re planning to buy a house now’s your chance!

The idea behind playing house in this sense is that you’ll get the chance to practice spending your money as though you already have the financial obligations that come with homeownership with the purpose of discovering if you’ve got what it takes BEFORE you sign on the dotted line.

Before we break it down lets get an idea what this looks like. You’ll start by doing some research into what it costs to own a home. Then you’ll input all your income and expenses into a balance sheet. Then you’ll spend some time living financially as though you already own a home. If your current circumstances cost $3,000 a month but homeownership would bump it up to $4,000 then you’ll put the extra $1,000 you’re not actually spending while you play pretend into savings.

Step one

Start with income. Whether you make a salary, work for commission, or own your own business, take a good look at your income history and get a good idea what kind of money you’re bringing home each month. Be as exact as possible. The worst thing you can do is overestimate how much money you make, start your house hunt, find the property you want, and then be denied a mortgage because you don’t make enough.

Step two

Now comes the harder part. Your expenses. You’re familiar with the expenses you pay already, but do you know what new expenses you’ll be taking on after you’ve purchased a home? You may already be paying rent, but how much do you think your mortgage payment will be? What utilities are you covering right now and how much will they increase once you’re a homeowner? Here’s a list of expenses you’ll have to anticipate as a homeowner.

-mortgage
-home insurance
-HOA fees
-property taxes
-utilities (power, gas, water, sewer, garbage removal, etc.)
-consumer debt (vehicle loan, student loan, line of credit, credit card, etc.)
-other home expenses (repairs, renovations, emergencies, furnishings, maintenance, etc.)
-consumer expenses (food, gas, phone, insurances, Netflix, savings, and all other spending)

Obviously this list doesn’t include every variable out there, but it does cover the basics. If you know that there’s an expense you’ll be responsible for make sure you add it to your list. The idea is to account for every dollar coming out of your pocket.

Mortgage

You might have been told what the “average mortgage payment” is in your part of town but if you’re serious about planning for homeownership that number isn’t going to do you any good. Instead of guessing go to a mortgage broker instead and fill out a pre-approval mortgage application. This will give you a good idea how much money certain lenders are willing to give you for your mortgage and what your payments are likely to look like. Add this information to your balance sheet.

Home insurance, HOA fees, property taxes and utilities

You’re probably already paying some utilities and other home related expenses. But as an owner you’re responsible for a lot more. In order to find out what kind of bills you’ll be paying as a homeowner you can start by talking to people in your area who own homes similar to what you’d like to buy. You can also go to some open houses and ask the current owners how much they have paid in the last 12 months for expenses related to the home. With this information in hand you can add it to your balance sheet.

Consumer debt

If you’re an average Canadian then you already have some non-mortgage debt. This includes things like a credit card, line of credit, vehicle loan, student loan and so on. The next thing you want to add to your balance sheet is a list of the payments you make each month toward this kind of debt.

If it turns out that adding a mortgage to the expense side of your balance sheet is going to make your debt-to-income ratio too high you may not be able to qualify for a mortgage. The best thing you can do for yourself is pay off as much of this debt as you can before you try to apply for a mortgage.

Other home expenses

The number one regret millennial homeowners have is not knowing just how much their house was going to cost. You may have accounted for your mortgage payment and the increased cost of utilities, but have you considered what it’ll cost simply to maintain your home? If you’re a renter how many times as your landlord paid to fix or repair something in your suite or in the building? Do you know how much it cost? Probably not. As a homeowner you’ll be on the hook for all sorts of expenses like regular maintenance, repairs, upgrades, renovations, and emergencies. If your new home is larger than what you were living in before then you’ll also have to consider more or bigger furniture.

Home experts suggest that buyers plan on spending 1% of the price of their home each year on maintenance. If your home cost $400,000 then you can reasonably plan to spend $4,000 every year on upkeep. This includes things like buying a lawnmower, replacing light bulbs, repainting or redecorating, installing a new hot water tank, replacing the roof, fixing the fence, and and and… If you don’t end up spending the money one year you should set it aside for years to come when a bigger and more expensive (and often unplanned) purchase comes along.

Consumer expenses

This category is more difficult to track because some of it is a regular recurring cost (like your Netflix subscription or your cell phone bill) and some of it varies (like gas for your car, groceries, visits to the dentist, etc.) In order to find out how much “spending money” leaves your account each month you’ll have to track your spending for 3 or 4 months to get an accurate number you can add to your balance sheet.

Add it up

Once you have all your numbers laid out you’ll be able to see right away whether or not you could theoretically afford to own your own home. If the numbers don’t line up and you wouldn’t be able to afford it then it’s up to you to move things around and find a way to make it work. Your first option is to increase your income. After that you can limit your expenses. Try things like: trading in your vehicle for one with a smaller payment or opting for a bicycle or bus pass in the summer months; limiting how often you eat out; decreasing your employment contributions to health benefits or retirement; reconsidering how much house you want to buy; etc.

The options are only as limited as your imagination. However, if you can’t seem to make it work on paper no matter how much you play with the numbers then you’re probably just not ready. Take a year or two to improve your situation and then try again.

Time to play

Once you have your numbers in order and looks good on paper it’s time to play pretend and see if it’ll actually work. Spend 6 months to a year living financially as though you own a home (as per the budget on your balance sheet.) If your current living situation really only costs $3,000 but homeownership will cost $4,000 make sure to put aside the extra $1,000 every month in order to simulate the financial experience you want to practice.

The reality of your readiness (or lack thereof) will become obvious after 2 or 3 months. Stick it out as long as you can (up to a year) and then decide which direction you want to go. If pretend homeownership feels like a breeze then you’re more than likely ready for the real deal!

Contact us today for more information on how to “play house” or to get started and do it for real!