I know I recently spoke about the importance of knowing the true cost of owning a home before you get into one, but I decided to follow up with another housing post because for one, particularly the Canadian housing market concerns me. It concerns me because today’s first-time homebuyers are taking on massive amounts of debt with these monster mortgages. My home’s value in the past 6 years alone, has jumped by about 75%, judging by similar houses sold in our area. And a lot of them are being sold well over listing price.
The low-interest rates certainly have a lot to do with fuelling sales. Just this week, Investors Group announced they were offering a 1.99% 3-year variable mortgage rate. Nuts! But while it may not seem like interest rates will be rising anytime soon, it is still worrisome that so many Canadians are working just to pay for their homes, leaving very little for little else, including the ‘fun stuff’ and saving for retirement. I certainly wouldn’t be able to afford them today.
Don’t live in a bubble
While many are talking about a bubble, that remains to be seen. I sense a crash coming, but even if the interest rates were to rise by a couple of percent, I have a feeling, anyone who’s built up any equity in their home, will turn to other financial vehicles, to extend their debt load and the amount of time they need to pay for it, instead of saying, ‘hey, wait a minute, maybe we CAN’T afford this house.’
When we signed up for a home equity line of credit to complete a minor reno, I was surprised to learn that we were only on the hook for the interest. Yup, we were only required to pay the interest – no principal. How crazy is that?
I’m not saying to avoid homeownership altogether. A home can be a fantastic investment. But I think far too many are chasing after the housing market just ‘to get in’ or because they feel they can because all of their peers are. But ultimately, the big question you should be asking yourselves before you get into any house should be, “can I truly afford this?”. So how does one go about living in a house they can truly afford? Easy…
Every house needs a budget
Hey, I understand not everyone loves to budget, and I get it. And week-to-week, month-to-month, there are some that seem to manage fine without one. But what I don’t understand is how anyone can know what house they can truly afford, without creating a budget. This is the biggest financial decision of your life. Don’t leave it to a bank or other financial institution to tell you how much you can afford.
I remember when I first went in to get my mortgage pre-approval. I went into quite a few financial institutions to compare. All they asked me for was our income if we had any debts and the size of my downpayment and came back with a number, much higher than I knew we could afford. But then again, they didn’t really know anything else about us. About our lifestyle. Did we have any children? Other obligations?
How much of a part does someone’s lifestyle affect how much they can truly afford? Well, consider these two scenarios. A single woman walks into a bank (no punchline here). She’s wanting to buy her first home. She makes $100,000/yr, has a 10% downpayment is debt-free. A married couple who has rented for years has decided their apartment is much too small for them and their two children. They’re looking to buy their first home too. Together, both Martha and Steve earn $100,000 per year salary. Everything else being equal, who do you think will have a more challenging time paying off the mortgage? Remember, they’re there to sell you a mortgage product, not to try and convince you that’s it’s a bad idea to do so. After all, they’re looking out for their best interests.
It’s time you look out for your own
So, before you lock yourself into a home, take the time to figure out, in an average month, what amount of money you’re able to set aside for all housing costs. Write that number down. Now visit my blog post on the true costs of homeownership, for all the potential expenses related to owning a home. You’ll have to come up with your own numbers based on your area. But once you tally up all those expenses, subtract the expenses from the amount you were able to set aside initially. The new number represents a rough estimate of how much of a monthly mortgage payment you’ll be able to afford. Can you afford a shorter amortization? Find out what other options are available to you and always to add a bit of a buffer to your monthly payment, in the case interest rates do rise.
See, it wasn’t all that hard. You have your whole lives to make your house a home, but there’s no need to be paying for it for the rest of your lives. So do yourselves a favour and plan ahead, and plan to live in a house you can truly afford and love.