Changing The Way We Think About Mortgages

By Robb Engen | November 3, 2010 |

I mentioned in my last post about the old adage regarding not spending more than 2-3 times gross salary on a house.  This rule of thumb was not one that was set by the banks, but it was a belief held by many frugal home buyers who did not want to over-extend themselves.  But is it realistic anymore in today’s environment?  Let’s take a look at some numbers:

According to the MLS, the national average home price in Canada was just over $330,000 in September 2010.  In order to purchase the average Canadian house, a family would need to earn $132,000 per year if they only wanted to spend 2.5 times their gross salary.

According to Statistics Canada in a June 2010 report, the average annual income for Canadian families is just over $70,000.  If the average Canadian family only spent 2.5 times their gross salary on a house, they could only spend $175,000 on their home.

If the average Canadian family is earning $70,000 per year and the average Canadian house costs $330,000 that means Canadians are spending 4.7 times their gross salary on their houses.  And it would take $66,000 to make a 20 percent down payment on the average Canadian house and avoid CMHC fees.

Are houses too expensive?  Maybe in certain markets, but the average price across the country still seems reasonable if you look at the growth of real estate over time.  Perhaps it’s wages that have stagnated and not kept up with inflation?  I think there is a case to be made for this point.  And what about the low interest rate environment that we currently live in?  Larger mortgages seem more affordable when you’re only paying 2 percent interest.

Personally I don’t believe that spending only 2.5 times your gross salary on a house is even close to being realistic anymore.  Even 2.5 times gross salary on your mortgage seems like a stretch.  I would feel comfortable with a mortgage as high as 4 times our gross salary, provided that we didn’t have any other debt (including car payments).  And I strongly believe in paying a minimum of 20 percent down payment on your house and amortizing over a maximum of 25 years.

Do you have any rules of thumb when it comes to your housing expenses?  Is it time to change the way we think about mortgages?

Things I Wish I Had Learned Earlier

By Boomer | November 2, 2010 |

They say it’s better late than never, but thinking over the things I’ve done (or not done) in my adult life, there are some lessons I wished I had learned sooner.

I wish I had prepared more for retirement.  When I was younger I felt I needed the money more for “today” so I missed out on contributing to my company pension plan and maxing out my employee savings plan and RRSP.

I wish I hadn’t racked up credit card debt to the tune of about $30,000 with multiple cards.  It took a long time to pay them off and interest rates were high.  Now, if I don’t have the cash, I don’t buy.  I have only one credit card and it is paid in full each month.

I wish I hadn’t done business with a friend.   I chose a realtor friend to sell my house and I felt he didn’t do all he could to advertise or have showings.  He had reduced his commission for me, and it’s hard to tell a friend you don’t like his service.  As a result, when my house finally sold I had only a month to purchase a new house and had to “settle” for not my best choice.

I wish I had taken more risks – both personal and financial.  As a single wage earner I was always worried that I’d end up with no back up savings for emergency situations.  I missed out on a lot of family memories by not spending on fun things we could have done.  I also missed out on greater financial growth by keeping my money “safe”.

I wish I wouldn’t have let financial “experts” talk me into purchasing certain products that were not right for me.  I lost money by thinking they knew better and not trusting my gut feelings and my own instincts.

I wish I had finished my university education.  I feel that I missed out on a lot of career opportunities by not having a degree, even though I was well qualified with my work experience.

We all say that if we could go back in time, we would do some things differently.  Are there any things you regret or wish you had learned earlier?

Upgrading Our House: Part Two

By Robb Engen | November 1, 2010 |

Last week I wrote about the process of upgrading our house.  There were 3 factors that we needed to determine:

  1. How much can we afford to spend on our new house?
  2. How much will our down payment be?
  3. When do we put our house up for sale?

Of course, when it comes down to how much we can afford to spend on a house, the bank has a different opinion than I do.  I take what the bank calculates with a grain of salt, as I don’t feel that anyone should extend themselves to the very limits of what they’ve been approved for.  That being said, the old adage about only spending 2-3 times gross salary on your house doesn’t seem to make much sense in today’s environment either.

The house we are looking to build will probably end up costing us more than I would have liked to spend, however I am happy to say that the final amount shouldn’t come close to what the bank has approved us for.  I say “shouldn’t”, because any time you are building a house with some estimated costs involved in your allowances and upgrades, I believe it’s prudent to factor in a contingency fund of at least 10 percent.

Our challenge lies with the down payment.  I would like to use all of the equity in our existing house to pay for the down payment on the new house.   However we need to declare our down payment to the builder and the bank in advance to starting construction.  If we want to continue to live in our current house while we build the new house, we will need to open a home equity line of credit (HELOC).  The bank will only lend us 80 percent of the market value of the house, minus the existing mortgage on the house.  So, for example if our house was assessed at $250,000 and our mortgage was sitting at $150,000 the bank will only lend us $50,000 in a HELOC.

The house we are building will cost upwards of $400,000 which means we will require $80,000 to satisfy the 20 percent down payment and avoid CMHC fees.  Even if we have an additional $30,000 to put onto our mortgage after the sale of our house, we would still have to pay the CMHC fees if our initial down payment is only $50,000 (or 12.5 percent).  So what should we do?

There are still many factors to consider, for example when do we absolutely need to be in the new house?  My wife and I have talked about this and we would love to be in the new house by this time next year (November 2011).  Since it takes five months to build the house we would need to start building by the end of May next year.  That also seems like a good time to put our current house up for sale, and gives me about six months to save up a bit more cash.

With so much to think about, doesn’t it seem like the easiest decision would be to just stay put?  While that may be true, we feel that this is a great opportunity to build the house of our dreams and are very excited to get started.

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