Written By: Catherine Ellis
Most people’s first question when looking at buying a house is, “how much will we qualify for?”. Qualification, and affordability, are two very different things. Household debt rose to 2.08 Trillion in the 2nd Quarter of 2017 in Canada, with Mortgage debt contributing to 1.36 Trillion and Consumer Credit equating to 609.6 Billion (Statistics Canada).
How a lender assesses your individual case is based on your gross income. A lender will allow you to utilize up to 39% of your gross income towards the expenditures of your new house. Household income rose in 2017 by 1.2% whereas Household borrowings increased by 1.9%.
They will allow you to utilize a maximum of 44% of your gross income toward all liabilities (visa balances, lines of credit, student loans, car loans or existing property expenses.)
Here are some expenses that are not taken into consideration:
- Day care
- Private School
- Phone Bills
- Tax Rate
- Savings Plans
We need to begin to rethink how we see borrowing money and our savings. We must learn to create an attainable budget that will allow us to determine what we individually can AFFORD, by determining our current expenses and deducting them from your net income. The remainder should be enough to cover both your new home (mortgage, taxes, strata and heat), and allow you to meet your savings goals.
Ask yourself the following questions:
How much are you willing to spend on the house each month?
How much do you want to save per year?
It becomes important to ensure you don’t over leverage yourself, and to ensure you can still save. In 1990 Canadians owed less than $0.90 for every $1.00 earned, whereas in 2017 for every $1.00 earned we owe $1.70 (Statistics Canada). You may need to ask yourself “what items am I willing to sacrifice to buy this home?” or “when do I want to be mortgage or debt free?”.
Following this simple approach allows us to not only achieve our goals of homeownership but also allows us to save for our future, our retirement and travel goals, and to allow us to follow the steps towards financial freedom.
Good debt vs. bad debt? What’s the difference? Good debt is when we borrow money to purchase an appreciating asset, such as land, a house, RRSP loans, or even gold.
Bad Debt is when we borrow money to purchase a depreciating asset, such as a car, new phone or travel.
Did you know the average Canadian holds a balance of $2,840 on their credit cards, $19,087 on car loans and $221,054 on their mortgage?
The goal, the end game, is to ensure that the cost to buy an appreciating asset does not negatively impact your ability to save at an appropriate level for your retirement goal and lifestyle needs. An important goal is that the principal will be paid in full, prior to retirement.
Net Income – (Expenses + Savings Goal) = Funds Available for Monthly Household Expenses
The key factor I wish to teach every one of us is to live within our means. This will allow more of us to build a budget and stick to it, so that we can reach retirement faster and with the ability to be debt free and not feel trapped by our expenses.
Remember, building a budget, living within your means and not getting yourself into a position of being asset rich and cash poor, will result in a happier and more secure future.