A recent article by CBC indicates that 85% of first-time home buyers spend the most they can when purchasing a property. This means they are maxing out their budget when purchasing their first home. Yet, 76% indicated they feel confident in making their monthly payments and only 33% say they worry about rising interest rates and qualifying for a mortgage.
When you max out your budget like this, you are taking on a huge risk. You are assuming that your income level will remain constant with no unexpected costs. I know from personal experience that you cannot rely on this expectation. When I purchased my first house with my wife, we spent within our comfort level, where one salary could pay for all expenses. We did this to cover our risk factor of something happening to our income and we are glad we did. Not even 3 months into home ownership, my wife was unexpectedly let go from her job, cutting our income in half for just over 6 months. If we had spent the maximum amount we qualified for, we would have either fallen into debt or lost the house. Since we purchased within our comfort level, we were able to keep the house, not accumulate any debt, and keep our savings intact.
When purchasing a house, you need to think of the long term, as most mortgages are for 20 plus years. If interest rates keep rising as they have been, when you need to refinance your mortgage, the monthly costs maybe outside of your ability to pay. A 1% increase in your mortgage rate equals a $200 increase in your monthly payments on a $400,000 mortgage. By maxing out your budget now, you are assuming your income will increase enough to pay for these additional costs in the future. If paying for your mortgage does not fit within your budget at that time, how will you pay for the house? Will you be able to cut other expenses back to find an extra $200 a month? The last thing you will want is to take on additional debt to pay off another debt.
A house purchase is a long term plan, with many twists and turns. There are countless items that can change over the 25 year time span of a mortgage. There are numerous items within a house that can break down over that time such as roofs, windows, furnace, and hot water tanks. Purchase a house you are comfortable paying for and is within your budget, which allows for savings, the unexpected and potential increase in mortgage payments in the future.
If you'd like more advice from Aaron on budgeting for homeownership, give him a call!
Get to know Aaron!
Susan Creasy Financial Inc.
621 Norris Court, Unit 5
Kingston, Ontario, Canada