How to test-drive your mortgage before you get stuck with a home you can’t afford
Unforeseen maintenance costs can be a budget killer as a homeownerAuthor of the article:
Transitioning from renting to homeownership is one of the most sought-after financial goals for many, but it can turn out to be a much bigger financial headache than expected if the pros and cons of such a move aren’t reviewed first.
Keep in mind that renting a home is often less expensive over the short term than owning. In addition to monthly rent payments, which includes water and heat, tenants may have to pay for their power, content insurance and sometimes parking. If they’re lucky enough to have in-suite laundry machines, they won’t have the added expense of using the pay-by-the-load shared machines elsewhere on the premises. Renting can also mean being at the mercy of irksome neighbours, as well as rental increases that are out of their control.
On the upside, renters don’t have to pay for replacing a faucet or door handle if they break, they just call the caretaker/landlord who’s responsible for fixing it. Any other building repairs and maintenance are also not the occupant’s financial obligation, but they could expect to see any improvements reflected in future rent increases.
One of the potentially beneficial trade-offs in renting versus owning is that tenants get peace of mind in lieu of building an asset. For both our aging population and for busy professionals, renting can mean less work because there’s less property maintenance. Most renters don’t need to worry about shovelling snow or cutting the grass. The rent includes the cost of the labour and equipment required to maintain the property. I can think of a lot better ways to use my time on a sunny Saturday than doing yard work.
Cost comparisons between renting and owning go way beyond reviewing the amount of the mortgage compared to the rent. There are many extra expenses that potential homeowners never had to think about. Things such as property taxes, insurance and water, as well as gas for heating a home can result in hundreds more in costs that renters just don’t pay.
Unforeseen maintenance costs can be a budget killer as a homeowner. There’s never a convenient time for your furnace to go or to replace your hot water heater. This is one of the reasons, after almost 18 years of homeownership, my husband and I now put our tax returns back into our house. There’s always something that needs to be done, repaired or upgraded.
Other unexpected expenses could occur when new owners discover that their home doesn’t come with appliances or they “have to” buy more furniture to fill those extra rooms they didn’t have before. This can result in new homeowners accumulating higher interest debt to cover these unanticipated costs. New homeowners can also find themselves struggling because the mortgage amount that the banks “qualified” them for is too high to allow sufficient funds to cover all the other costs of living. Any or all of these could result in first-time homebuyers finding themselves “house poor.”
Before being trapped in a housing situation beyond what is affordable, consumers should test drive their mortgage by trying to live on a hypothetical homeowner budget long before looking at what houses are for sale. This starts with knowing what is affordable, which can be ascertained using one of the many online mortgage calculators the banks offer. Once completed, the online calculator will provide the maximum amount of mortgage and payment the bank deems is affordable.
As this result is dependent on how much down payment is available and other debts a consumer might have, the calculator may indicate a lower mortgage amount than hoped for. If consumers are faced with this situation, they might want to consider delaying a home purchase to allow time to reduce their overall debt load and/or accumulate more savings for the down payment.
Of course, the opposite may be true and the potential buyer may find the mortgage amount the calculator deems affordable higher than what they’d expected. As these online calculators often don’t account for many of the unexpected and increased expenses mentioned above, it’s advisable to aim for a mortgage amount based on a payment that fits in your budget, rather than the maximum the bank wants to lend you.
Now that you’ve got an estimated mortgage payment, you can start adding on all those additional house-related expenses listed above. A little research will reveal what you can expect for property taxes, utilities and house insurance for a given area.
Sound confusing? Let’s use Bob and Suzie’s scenario to explain. Bob and Suzie have been renting since they got married, but they’d like to buy a house with more bedrooms and a yard for the family they hope one day to have. They have done their budget and know that their current rental housing costs total $1,700, including tenant insurance, power and laundry. An online mortgage calculator has told them they could afford a $500,000 house based on their income and available down payment. This couple is cautious and that much mortgage makes them nervous.
They’ve also seen homes in an area they like in the $400,000 range. As they have not saved 20 per cent of the purchase price, they will have additional Canada Mortgage and Housing Corp. fees to insure their higher-ratio mortgage. This means that with 10 per cent down, they could be looking at a $370,000 mortgage. At a favourable three-year rate of 2.14 per cent, their monthly payments will be approximately $1,720.
If we estimate their property taxes, power, water and house insurance to be another $880 per month, their new housing expenses estimate would be $2,600 per month, an increase of $900 over what they are currently spending. If Bob and Suzie are serious about becoming homeowners, they can start putting away that extra $900 per month and see how their budget reacts. If it’s no problem after six or so months, they may be ready to buy a house. If their test drive shows that saving that amount cramps their lifestyle too much, or they start to accumulate debts to cover the shortfall, they should go back to the drawing board and revisit the budget.
If they aren’t willing to cut back on spending or to save more for the down payment, they may have to shrink their dream home to fit within what is affordable for their budget.
- PHOTO BY GETTY IMAGES
- Sandra Fry, Special to Financial PostPublishing date:Jun 25, 2021