Monday, January 25, 2010

Affordability is a Personal Thing

One of the most difficult things about buying a home - especially a first home - is the temptation to spend more than your income will comfortably allow.

It doesn't help that lenders tend to approve potential buyers on the premise that they don't have any expenses beyond those that revolve around their household - i.e., heating and electricity - and any outstanding debts. It also doesn't help that, the more money you spend, the higher your real estate agent's commission.

As a result, a homeowner's maximum prequalified loan amount tends to be much higher than what they can comfortably afford - and there are often a lot of forces working against them (sales pressure, bidding wars, emotions) encouraging them to spend the extra money.

In a recent episode of HGTV's Property Virgins, this scenario was played out in front of the rolling cameras. The show's host and real estate "guru", Sandra Rinomato, frequently encourages her first time buyers to purchase "as much house as they can afford" - and scoffs at those who cautiously don't want to spend their fully-approved amount.

In this particular episode, a young Toronto couple - both elementary school teachers - were approved for $450,000 with a $20,000 down payment. It's unlikely that either of these teachers were making more than $50,000 a year max, bringing their total income to somewhere around $100,000 before taxes. They were looking at homes between $350,000 and $400,000, but when they found a condo for $440,000, they - meaning the wife - fell in love with it. While the husband wasn't certain it could fit into their finances, a quick bat of his wife's eyelashes convinced him that they could, and they ended up going for it.

I have no idea when this particular episode was filmed (although it seems to be before the minimum down payment was raised to 5%), or what the interest rates were at the time, but even if they landed a mortgage at 4%, their monthly mortgage payment would be around $2,209.28 - plus condo fees ($220), property taxes ($200), and hydro ($100). Factor in an extra parking space ($150), that takes us to $2,879.28 a month - a fair chunk of the couple's after-tax income of approximately $6,029/month - and we haven't even addressed groceries, entertainment, take-out dinners, car payments, car insurance and all the other expenses that accompany living in an expensive city.

To leave yourself some breathing room, make sure you're well aware of your monthly spending habits before heading out to hunt for a home. Once you know where your money goes, work backwards and determine what monthly mortgage amount you can afford - and what that translates into in terms of a house price. Settling for a smaller home may not seem like a sacrifice when you can afford that extra vacation, or renovation, or fine dining experience that your house-poor neighbours can only dream about.

This article is provided courtesy of Axiom Mortgage Partners.

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