Back when I was a young buck working for the bank it was very satisfying to be able to approve a mortgage for a client’s home purchase, and honestly, almost all of the mortgages were approved. For many of us, buying a house is one of the biggest and most life-changing purchases we will ever make. It’s the place that provides us with shelter, where we celebrate birthdays and holidays, and look forward to returning to after a hard day at work or a long trip overseas. But with real estate prices sky-rocketing in some parts of the country, many people are finding themselves “house poor,” making this would-be gratifying milestone more stressful than it should be. Here are some guidelines to help you secure that dream house without turning your life into a nightmare.
1. “Know your limitations”
Clint Eastwood was famous for this quote in his Dirty Harry movies. Overextending yourself and not factoring in all the other costs of home ownership is a common mistake. Property taxes, property insurance, hydro, gas and cable charges all add up to thousands of dollars every year and these costs rarely come down. Add this to the initial legal fees and land transfer tax on the purchase of a home, and buyers who have budgeted for little more than the down payment may find themselves maxing out their credit accounts.
2. Renovations can wait
Does it need to be perfect right away? No. And again, know your limitations (weekend handyman projects done by me hardly ever pass the spouse test). The kitchen counter, though dated, can still support you making a peanut butter sandwich and the carpet in the ensuite may be tacky – but that isn’t going to stop you from having a shower. These home improvements can wait until you’ve had a chance to reaccumulate some savings.
3. Bigger family = bigger expenses
I often reflect on the past 23 years and am amazed that my wife and I thought we had the financial potential to raise four children, three dogs and a cat. A recent study out of the U.S. says that a child born in 2015 and raised until age 18 will cost $233,000.¹ This means that if you plan to have a family of your own, being mortgage free may take a bit longer.
4. Have goals
“Let’s be mortgage free by age 50!” It doesn’t really matter what age you pick – just have an end game. At the very least, be debt free by the time you retire. Not having that fixed monthly obligation is very valuable to your financial flexibility in retirement.
For the past 25 years or so, Canada has been in a very low mortgage rate environment. But does anyone remember April of 1982, when a five-year rate reached as high as 19.41%? ² Who knows when rates will rise again – or by how much – but the time will come. When it does, you’ll be in a much better position to handle it if you budget accordingly for your home purchase, have a positive monthly cash flow, and set realistic goals for managing costs associated with your family needs and home improvement projects. This will lessen the shock of an increased mortgage payment, and allow you to maintain the lifestyle you’re accustomed to. In the meantime, don’t hesitate to put away some extra cash to pay down the principal balance before you have to renew it at a (possibly) higher rate.
¹ Global News. (2017, January 12). How much does it cost to raise a kid in Canada?Retrieved from http://globalnews.ca/news/3172459/how-much-does-it-cost-to-raise-a-kid-in-canada/
While the U.S. Department of Agriculture releases a yearly figure on how much it costs to raise a child, Canada doesn’t have a definitive number. U.S. info is based on estimates of housing, transportation and clothing costs, among other criteria. A 2011 article that appeared in the Canadian publication MoneySense placed the estimate at $12,824 a year, which equals $243,656 over 18 years. Those numbers were then updated by the magazine in 2015 to reflect inflation. The yearly average rose to $13,366.
² Bank of Canada, Data and Statistics Office. Average Residential Mortgage Lending Rate – 5-year. [PDF] Retrieved from http://www.bankofcanada.ca/wpcontent/uploads/2010/09/selected_historical_v122497.pdf
Terry Willis has almost 20 years’ experience in financial services, with particular expertise in working with professional athletes. He understands that the earnings potential of most athletes is often short-lived, and helps young athletes put financial plans in place from their earliest money-earning playing days. Terry provides these players with ongoing financial counsel right through their sports careers and into post-retirement careers.