Financial reality doesn’t always fit into dream home

Edmonton Journal – Saturday, June 9, 2007
Wendy McLellan - Vancouver Province

Buyers urged to ask themselves what sacrifices they are willing to make

Looking to get into the housing market? Before you start scanning the weekend open house listings, consider how much house you can afford.

“You might technically qualify for a certain mortgage payment, but the lender’s calculations won’t take your personal budget and lifestyle into account,” said Paul Siemens, a mortgage broker with Invis. “You have to look at all your expenses, then figure out how much you’re comfortable paying in housing costs.”

Mortgage lenders use standard calculations, called debt-service ratios, to determine how much borrows can afford to pay. Under these ratios, housing costs-principal, interest, property taxes and maintenance-cannot exceed 32 per cent of gross income and total debt can’t exceed 40 per cent. For people with strong credit records and low debt, lenders may consider a 44 per cent total debt ratio rather than using two separate calculations.

The ratios often suggest you can afford a whopping mortgage payment and buy the house of your dreams, but house-hunters need to take a harder look at their financial picture.

“Anything that is not a loan payment isn’t factored into those ratios. Gym memberships, life-insurance premiums, RRSP deductions – all of these should be considered to figure out what you can afford. It’s not how much you qualify for, but how much you are comfortable paying.”

For James DeBoer, the toughest part of his job is talking to clients about the financial reality of the dream house.

“It’s really hard to coach people who are determined to get into a particular home and they’re willing to take risks,” said DeBoer, a certified Financial planner with Investors Group. “They are ready to scrape together anything to live in a beautiful home they can’t afford, and it’s hard to bring their expectations down.”

DeBoer works with clients to calculate their monthly income and how much their current lifestyle costs. From there, clients can see how much disposable income they have, and how much they are willing to pay for mortgage.

“Maybe you can qualify for a high mortgage payment, but what are the sacrifices you will have to make?”

Vancouver money coach Sheila Walkington suggests people practice being homeowners before deciding they can afford to get into the house market. For example, if they think they can pay $2,000 a month in mortgage and housing expenses, save that amount, less rent costs, for a few months. They should also plan to put aside about $200 a month to deal with inevitable home maintenance costs.

“It’s always good to practice for a few months beforehand, so it’s not such a shock when you do start paying a big mortgage payment – and the more time you have to practice, the better,” said Walkington, a certified financial planner.