House bloat
How not to bite off more mortgage than you can chew,
It’s recommended you spend 35 per cent of net income on shelter, but make sure to include all fees in that figure
Kara and her husband, Petrie, decided to get preapproved so they could shop for their next home knowing the mortgage was good to go. They couldn’t believe how much the bank said they could borrow.
If you think that a lender won’t give you more mortgage than you could afford to repay, you might be wrong. In 2011, a study showed that 200,000 Canadians couldn’t manage any increase in their mortgage payments, while another 700,000 couldn’t handle a $200-a-month jump.
The mortgage you qualify for should not be the determining factor is how much home you buy. Lenders have been throwing money at people, confident in their ability to claim any losses back from the Canada Mortgage and Housing Corporation (CMHC). Normal lending criteria have gone out the window, replaced by quick glances at credit scores.
I’ve heard stories of bankers encouraging people to put down less money so that the mortgage will be CMHC-insured. I’ve even heard stories of people being offered better interest rates for smaller down payments. Go figure.
My rule is to not spend more than 35 per cent of your net income on shelter, including mortgage payments, property taxes, insurance, utilities and maintenance.
If you bring home $3,750 and your mate earns $4,225 after taxes each month, you have a total net income of $7,975. Divide that by 100 and multiply by 35. That would give you $2,791 you could afford to spend on shelter.
That is not how much you can afford to spend on a mortgage. What’s it going to cost for your property taxes? I live in the bush and pay about $300 a month. My home insurance runs to $100 a month. Utilities (heating, electricity, water, sewage) cost me about $225 a month.
Then there’s home maintenance. If you pay condo fees, use those plus an additional $200 a month for stuff you have to do inside your unit. No condo fees? Use 3 per cent of the value of the home, sans property. For the sake of projection, let’s estimate $500 per month for maintenance.
When you add up all those costs, my tab would come to $1,125 not including a mortgage payment.
So if you have $2,791 to spend on shelter, and you’re spending $1,125 on everything but mortgage, you have up to $1,666 to spend on your mortgage payment.
Time to head over to a mortgage calcu- lator to see how much mortgage you can afford.
Plug in different mortgage amounts to see which number comes closest to what you can afford. Don’t squeeze yourself into the biggest mortgage you can manage, since any increase in interest will take your mortgage payment higher at renewal.
If you’re in over your head on housing, it means having very little life. It can also mean being tempted to use credit to supplement your cash flow.
If you must spend more than 35 per cent on shelter because . . . well, houses, y’know . . . you better eliminate all your consumer and student debt first to keep your budget in balance. And you best be prepared to spend less money on just about everything else in your life. Gail Vaz-Oxlade’s column appears each Tuesday in Smart Money.