Buying As Much House As You Can Afford, and Not Working to a Budget Can Set You Up for Failure
In our zeal to qualify for a mortgage, we strive to meet the debt service ratios used by all major mortgage lenders. The rule of thumb the lenders use is your mortgage payments, property taxes and heating bills should be less than 32% of your gross monthly household income.
They also consider other monthly obligations like car payments and credit card payments, and decree your total housing costs and debt payments should be less than 40% of your gross monthly household income.
It always seems to me the standard calculation of household expenses is out of date and does not reflect reality. Every household I encounter in my business has a monthly hydro and water bill for example. They also have cable costs, internet costs, cell phones and often land line phones.
And almost all houses need to be maintained. Who cuts the grass and plows the snow? Who fixes things when they break down? And then there are unforeseen major expenses like roof repairs, leaking basements, termite flare ups, ant infestations etc. And if you have a pool, that’s almost $1,000 just to open and close the pool each year, plus weekly cleanings and chemical treatments, and the extra heating and hydro pools while the pool is open.
And what about your children and your pets? Or the aging parent who may live with you? The lenders don’t ask if your teenage son plays hockey five days a week at an annual cost of more than $15,000 after tax dollars! They don’t (at least not obviously) care if you have one child or four – but we all know the monthly financial burden of raising children is not cheap.
They don’t stop to consider whether or not you plan to contribute towards your kids’ post secondary education, or the increased costs of medication and care for your elderly parent.
No, the harsh reality is the only person who cares about all this stuff is you.
But we are conditioned to buy as much house as we can possibly afford – using metrics and approaches that are hopelessly out of date and not reflective of life’s realities.
Most home buyers we meet in our business stretch their budgets to the max to get into their ‘dream home’. They have no back up plan, no savings, and are often only one or two hiccups away from financial chaos.
These hiccups inevitably lead to the use of readily available credit such as lines of credit or credit cards. Balances accumulate, often at high interest rates, and a further monthly minimum payment obligation is slapped on top of an already over worked monthly budget.
Ah, budget. Yes, we all talk about “the budget”, but very few households actually have a set budget and even fewer live within the means of that budget.
I am sure that’s why we are seeing record levels of financial stress in Canadian homes – and that is with interest rates at all time low levels. God help us all when they pop higher in the years ahead.
What can you do to prevent yourself from buying “too much house”?
Do yourself a favor, and take an honest hard look at the totality of your monthly obligations, and make sure you are not setting yourselves up for stress and failure. Some enlightened industry experts argue your household expenses should in fact be no more than 25% of your total household income – and they have a valid point.
Every one of our mortgage or credit counseling clients are given a detailed budget and financial framework to work with for going forward. Our concern is not just with fixing the problem of the day, but more importantly, making sure we set you up for success and happiness.
If you don’t take these considerations into account, no one else will. The lenders are protecting their behinds with their outdated approach to assessing your ability to make the mortgage payment – who is watching your back?
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Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
With unique dual certification as a licensed credit counselor and mortgage agent, Ross's insights are valued by mortgage professionals and homebuyers alike.
If you have questions about anything financial or mortgage-related, please contact [email protected]. Ross answers everyone personally.
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