Are you a renter? Do you live at home? Are you planning on becoming a homeowner yourself one day? If purchasing your first home is on the docket you’ll have to prepare. You might be accustomed to taking care of a few bills. You may even be putting away money for a down payment. But do you really know what it’ll be like to own your own home?

Not only will you be responsible for caring for your home, but you’ll also be responsible financially. What does that truly look like? If you’re already paying the bills where you live you might think you already know what it’ll take, but guess again. Homeownership comes with a lot of extra expenses many new owners didn’t know about or plan for.

Beta testing the homeowner lifestyle means that you’ll calculate all your expenses of homeownership and then live financially as though you already do own a home. For example, if your current living situation costs you $4,000 a month but living in a home you own will cost $5,000 then you’llĀ  beta test the lifestyle by spending what you need and additionally putting aside $1,000 each month. This will simulate the spending you’ll be doing as a homeowner.

Step one

The easiest step to take when you’re planning out your beta test is to calculate your income. If you’re a salaried employee this will probably be pretty easy. If you work for commission, are self-employed or have multiple streams of income you’ll have to do a bit of research into your income over the last two years and accurately determine how much money you make on average each month. And make sure to work with the income you have right now, not the income you HOPE to have when you buy your home.

Be sure that you use your “take home” number, the amount that shows up in your bank account after taxes, deductions, fees, and your blood, sweat, and tears have been deducted. Also consider that if you’ll be buying your home with a partner you’ll need to account for both of your incomes. Once you have this number you can start your balance sheet. This is a layout of all your incomes and expenses.

Step two

Your next step will take more time. You’ll need to lay out each and every expense you have for the month. Some of these expenses will be easy to calculate because they are the same each month, like your internet bill, Netflix account, cell phone plan, etc. But others, like gas and groceries, fluctuate. Here’s a list to help you get started.

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

If you know there are other expenses you’ll be responsible for make sure you include them.

Mortgage

How much mortgage can you afford? The easiest way to find out is to get a pre-approval. This application can be done at a single lender but it is more effective to have a mortgage broker do it for you. This is because the broker can submit your application to several lenders at once. The lenders will tell you how much mortgage they may be willing to loan you. This will also include your monthly mortgage payment.

Keep in mind that even if a lender offers to give you more than you planned on you don’t have to take the full amount. Pick a payment you can reasonably afford to make each month and add it to your beta balance sheet.

Property taxes, HOA fees, home insurance, and utilities

Are you familiar with these expenses? Do you know how much they’ll cost in your new home? Expenses related to your property will include things like property taxes, HOA fees and home insurance. It will also include utilities you may already be familiar with, such as electricity and gas. However, the cost of these kinds of utilities is probably going to be a lot higher if you’re making the move from a small home to a larger one. There will also be new utilities you haven’t had to cover before, such as water, sewer, garbage removal, and others.

In order to get accurate numbers you can do two different things. Firstly, you can talk to people in your neighbourhood who own homes similar to what you’d like to buy. Secondly, you can go to open houses and ask the current residents how much they have paid in the last year for costs related to the property.

There may be additional expenses not listed here, so make sure to talk to the experts and find out what you can expect. Once you have a good idea what each expense will cost you can add them to your beta balance sheet.

Other home expenses

This is a category of expenses far too many new homeowners don’t consider. It includes things like buying a lawnmower, repairing a leaky faucet, replacing a broken washing machine, putting on a new roof or setting up a new fence, buying more furniture and decorations, and so on. The number one regret millennial homeowners have is that they didn’t anticipate these extra expenses.

These kinds of repairs, emergencies, and maintenance will cost you approximately 1% of the price of your home each year. For example, if you paid $500,000 for your home you should plan on spending $5,000 every year on upkeep. If you don’t spend it one year though don’t treat yourself to something nice. Put the unused money aside for years to come when you have to pay for a larger more costly repair, like replacing your furnace.

If you’ve already got a good idea how much house you want to buy you can estimate how much this category will cost you each month an add it to your balance sheet.

Consumer debt

If you’re like most Canadians you’ll head into homeownership with some existing debt. This includes things like a student loan, vehicle payment, line of credit, and credit card (just to name a few.) If you have this kind of debt and it’s likely that you’ll still have it as a homeowner, find out what your payments are and add them to your balance sheet.

While we’re talking about it, it’s a good idea to get rid of as much debt as you can before you try to get a mortgage. The less debt you have the better your debt-to-income ratio will be and the more likely you’ll get approved for the mortgage you want.

Consumer expenses

These kinds of expenses are the most difficult to track because they come from so many places. It includes eating out, buying groceries, gas for your car, a trip to the dentist, extra data on your phone plan, buying a new wardrobe, etc. etc. Spend 3 or 4 months tracking every single dollar in this category and you’ll have a good idea how much “spending money” you use each month.

Chances are these expenses aren’t going to change once you’re a homeowner but if you know ahead of time that these may increase (or decrease) take that into account. The key is to be as accurate and realistic as possible. Add this amount to your balance sheet.

The beta balance sheet

Now it’s time to review your beta balance sheet. Once you’ve compiled all your incomes and expenses and done a quick sum of each side you’ll see instantly if homeownership is in your budget. If it isn’t, try reworking the numbers. Look for ways to increase your income. Then find ways to decrease your expenses. Trade in your vehicle for one with a smaller payment. Get a smaller phone plan. Opt for cheaper internet. Trade power companies. Decrease your contributions to medical insurance or your retirement fund. Eat out less. Cancel your cable subscription (are people still watching cable?)

If being a homeowner is your goal find a way to make your budget work.

Time to test

If you can’t find a way to make homeownership fit within your budget, try working with a financial adviser for more options. If you CAN make the numbers work in your favour it’s time to put the plan to the test. Try living by your beta balance sheet for six months to a year. If your current home and lifestyle cost you $4,000 a month but homeownership will cost you $5,000 you’ll need to set aside $1,000 each month to simulate the financial experience. It may be an adjustment but give yourself a few months to settle into it.

If you find the transition is just too much of a struggle go back to the drawing board and see what you can change. Alternatively, if you find that beta testing the homeownership lifestyle is working for you then you’re probably ready to move on to the real thing! Contact us today to get started!