Something that I often hear from buyers is “We are approved for a mortgage of $300,000 but we only want to spend around $240,000.” That’s not a problem, and may even be wise, especially if you are thinking of increasing other expenses such as buying a car or perhaps you intend to start a family soon. But when I ask most people why they don’t want to spend as much as the bank has suggested they can, the answer is usually vague. I find that people tend to focus on the big picture, that is, the price tag instead of the affordability. The big number frightens them and they often get hung up on the fact that they are spending almost a quarter of a million dollars, instead of knowing their mortgage payments will be about $1440 a month or less depending on the down payment and the interest rate. The extra $60,000 could carry for about $360 a month, which may be less than what they spend on lunches and designer coffees.
One thing that is crucial to a successful home buying venture is to do your number crunching well in advance. You should start by writing down a detailed outline of what your expenses are—the way you live now. Be honest and don’t forget to include things like gifts, concert tickets and vacations and all that java. You might be surprised by just how much money you spend every month and you may wish to make some smart sacrifices in order to achieve your goal.
The first step is qualifying for a mortgage with a mortgage specialist. You will soon know how much of a mortgage you qualify for, and what it will cost every month to carry that mortgage. The lending institutions have collected extensive research data to help them determine what you can and cannot afford based on Canadian trends and lifestyle and will not give you more than you can handle. They are in the lending business, not the real estate business and they really don’t want to take your home from you!
The next step in the process is to determine the home’s carrying costs once you have found one that you love. To evaluate whether a home is truly ‘affordable,’ you need to weigh your payments against your expenses including mortgage payments, property taxes, home insurance, heating costs and other utilities. Then add a realistic figure to cover yearly maintenance costs. By the way, the bank has already taken these expenses into account when they qualified you for the mortgage. Don’t forget to factor in a savings plan both for the long-term and for unscheduled expenses such as repairs.