First-time homebuyers constantly face financial pressures, a lot of them. There’s the urgency to save for a down payment (which we can help with), the inevitable legal and closing fees, and moving costs, to name a few.
But there’s one really major financial pressure that many new homeowners find themselves under – the cash crunch in the early days after getting the keys to their new home. It’s not uncommon for first-time homebuyers to have next to little money left over after moving into their new home. In fact, it’s very common. This creates a ton of stress and turns the short-lived excitement of a new home into tremendous anxiety.
This alone is just one of the many reasons why we’re supporting first-time homebuyers by providing the down payment.
In addition to the tireless amount of saving you’ve done to buy your first home, it’s super important to understand the upcoming expenses and make sure that you have sufficient cash-flow to pay for them.
But just how much should you tuck away to pay for these expenses? Traditionally, experts have recommended saving the equivalent of three months’ salary for any expenses related to moving into a new home. Now while this might seem like a bit of a stretch, you should actually consider saving even more than that. Here’s why:
First-year surprises
When a friend of mine first bought her first home, the first thing she noticed was the bills. In the first year she was getting a steady stream of letters from various organizations demanding money for this and for that. Just about every utility that serviced the home had an account transfer fee. Even the municipality charged a change of ownership fee for the property taxes.
Then there’s the chance of unexpected surprises that [do] happen on closing. We’ve all heard the horror stories of sellers taking all of the light bulbs with them, or leaving the home full of garbage that needed to be hauled away – unfortunately, these situations happen. Chances are most of these expenses will be relatively small, but having a solid amount of money tucked away and additional cash on hand will help keep these annoyances from becoming disasters.
Things break
When you own a home, you become the newly appointed landlord. That means there’s no one to call when things go wrong or break. And, unless your new home is newly constructed, there’s also no warranty.
The minute you get your keys, the home – and everything in it – becomes your responsibility. Things will break, and it’s possible that a major component of the house could fail even on the first day you own it. Your furnace could fail. So could your air conditioner, water heater, washing machine, dryer, dishwasher, oven or refrigerator. Sounds expensive right? That’s because it is.
Insurance won’t help, either. Your home insurance is intended to cover you in the event of a major loss- a fire, theft, or vandalism. It doesn’t protect you against broken down appliances or general wear and tear.
Again, having a solid amount of money tucked away and additional cash-flow will help keep these major expenses from completely busting your budget.
Mortgage payments are non-optional
We would never recommend paying your rent late, and for obvious reasons. Your credit can take a hit, and you could even be evicted from your home. You’re almost certain to lose your deposit on top of being sued for the amount you owe. It’s just not a good situation whatsoever, but the repercussions are fairly self-limiting.
However, when you own your home, everything is at stake. If you fall too far behind paying your mortgage, the lender (or mortgage insurer) can evict you from your home and sell it to recover what you owe them. In certain provinces with power of sale, money left over after all of their expenses and fees will be returned to you. In provinces with foreclosure, you lose everything no matter what.
In both cases, if the home sale doesn’t cover all of what you owe, you remain completely liable for the difference. And in the absolute worst case, you could have to declare bankruptcy, which has a long-lasting effect on your ability to get any sort of credit.
Having a sizable amount of savings tucked away can help prevent this situation in a few ways. In the worst-case scenario, your savings (let’s call it an emergency fund) can help you keep making mortgage payments while you sell your home on your own terms.
Added tip: By having access to the full down payment amount through ARCH you’ll be able to lower the total amount owing on the home, meaning that your monthly mortgage payments (and interest) will be considerably lower. This means you’ll have more cash on a monthly basis to tuck away in a savings and emergency fund.
Credit will be harder to come by – at least at first
When you buy a home you can expect your credit score to take a hit, at least at first. Couple that with having recently moved (and a recent job change, if you’ve moved for work), and you are suddenly no longer an ideal candidate for borrowing any sort of money. Your savings (and cash-flow) can help carry you through this period after buying a home when it may be harder to get approved for traditional types of loans.
Fortunately, if (and when) you make all of your mortgage payments on time, your status as a homeowner could actually make it easier for you to borrow money in the future.
Cash-flow is king
Having a sufficient amount of savings and additional cash on a monthly basis isn’t just a good idea, it’s absolutely necessary when you’re on your way to becoming a new homeowner. Having some extra savings can make the transition to ownership easier, and it can make the early days of having your own home a lot less stressful, too.
