If I had a nickel for every time I’ve had this discussion with clients – and even at home! Many of you might think that this is a question limited to first-time home buyers, but you’d be wrong. It’s also quite a common question among buyers who also have to sell and want to make a change (larger home, different town, fresh idea of how to live), and downsizers, who cling to “will we be able to give this up” and “what about all the equity we’ve built up?” We even have this discussion here at home, and on a semi-regular basis.
The first thing I can tell you is that it is never just a money question. The heart wants what it wants, as they say, and that desire for change will need to be satisfied. Now that is not to say the money isn’t important. Of course it is. And life is too short to spend it being unhappy. Suppress it if you will; it will continue to bubble up and will be a great source of discomfort and friction. So do find some actionable steps that will address at least some of the change you want.
Let’s say a financial evaluation shows that you simply cannot afford the dollars and cents part of the equation. What can you do? You’ll need to look for stopgap solutions, such as re-configuring your current space to be more workable, or taking holidays in the new location until you can make a permanent move, or “test driving” those downtown condos for a bit before selling the big house.
Eventually, you’ll likely bite the bullet and take a hard look at your finances. I actually discourage spending more than you had hoped until you have worked out by yourself, or with your financial advisor, how to do it without living in pain going forward. If you are privileged enough to have choices, make the choice to have some wiggle room in your budget to actually love where you live – always. Just yesterday I discussed this with a young couple on the beginning of their home buying journey. If they buy with me soon, that’s great. Sooner than later nearly always works out in the long run. But if they wait a bit until they can see a solid way forward that won’t create friction in their lives or relationship, that is perfectly fine. For me, real estate isn’t some sort of pump and dump scheme. It’s a real (emotional and financial) investment in your future.
Now, let’s think about the finance side. How DO you know if you can afford the home you’re considering? The best first step is to have an honest conversation with whoever is in it with you (parents, partners, or your financial advisor) about all the resources at your disposal. How much do you have saved? How many home buying programs do you qualify for? Do you have a FHSA, or even know what one is? (It’s a first home savings account – happy to explain further if you have more questions!) Will your family or others be helping? Are you co-buying?
Next, visit a mortgage expert. I’ve said this before, and I’ll say it again, because I’ve made this mistake myself, when I was younger. Don’t start with your bank. Start with a mortgage brokerage. A good mortgage agent there can shop around for you, and show you a variety of options. Rate isn’t all that’s important – especially in today’s volatile financial environment, you need to understand flexibility, and your ability to adapt, change, or even get out of that mortgage in favour of a better option, if you can. They will ask for quite a few more financial documents than your bank. Why? Because your bank has already had you sign permission for them to look at, well, just about everything about you, frankly. So they’re not asking for the documents because they can already pull them without additional permissions.
You can arm yourself by figuring out some of your key ratios in advance, if you’re worried about whether you might be approved, or not, and for how much. There are some simple calculators that will tell you how much different down payments will impact the total you pay, or what a mortgage at a different rate will cost per month, on my website under “buyers” (www.megannwillson.ca) but the ratios you’ll want to know are called the TDS and GDS. I explain how to calculate those in this previous post: Thanksgiving or Halloween…Which October Holiday Matches Your Debt Ratios? | Megann Willson, HomeLife/Realty One Ltd., Brokerage.
Armed with this information, you’ll know what to expect. Don’t give up if you have more debt than is prudent. You can work to pay it down before proceeding, and your mortgage agent can also research B lenders, or lenders beyond the most commonly-used banks and credit unions. They’ll cost you more, but they are a viable option. Once you’ve talked to your mortgage agent, you’re ready to set your budget and get serious about looking. Bear in mind that financial institutions will often lend you more than you should prudently take! This point was brought sharply home to buyers living at the very edge of their mortgage qualification when rates went up, and it is the reason the government has instituted what is commonly-known as the stress test (that’s the test as to whether you would still qualify if the rate on your mortgage went up by a few points).
Now, what if you’re at the other end – the downsizer? Again, it’s not just about the money. I’ll tell you a couple of things. Your kids don’t want that old stuff you’re saving for them. Believe me. I cannot tell you how many times I have seen this. If you want to extract the money you’ve built up, you can consider a reverse mortgage. But more likely you are thinking the house is all just…too much. Start with my above suggestion. If escape to the country is on your mind, start taking some mini vacations in towns you admire. If condo life seems right, go stay in a few Air BnB locations, or ask a friendly agent to show you a couple of properties that “look right” online. Then remember the heart that we talked about earlier. Is family dinner absolutely vital? Party rooms are okay, but for some, that big table is an absolute essential. Do you hate worrying about your garden when you travel? Give it up, and move somewhere with a concierge for the peace of mind. It really depends on how you want to live your life. Then think about whether that meshes with how you DO live it now. (If you’ve had an aspiration of family dinners for the last decade and they’re not happening, they probably won’t start now). If your kids aren’t coming by regularly, they’re probably not going to spend their vacations with you, either.
All of this may be hard talk, but it will help you satisfy both the heart and the mind, when it comes to making your next move. More questions? I’m only a call away.