You don't have to choose between your mortgage and your life
Spring often brings with it the start of a fresh new house hunting season for potential homebuyers looking to move, upgrade a home they have outgrown or make their first purchase. I have heard many house hunting couples say “We’re going to the bank to see what we can afford.”
It seems the mortgage number provided by the lender is often taken at face value with no further thought. It is often perceived by many as the magic number someone can “afford”.
This calculation however, while a good start, is only part of the equation. You will do yourself a great service to stop for a few minutes and look at your full financial picture.
It is indeed true the lender will use a formula – generally either a Total Debt Service Ratio (TDSR) or a Gross Debt Service Ratio (GDSR) formula to arrive at the maximum amount of mortgage they are willing to extend for the purposes of buying a home. This formula is a good measure for the lender to ensure they are not overextending credit beyond a reasonable limit. Essentially, these ratios determine the maximum amount they are willing to loan to you for your home. However, because it’s a generic formula, it cannot account for variances in individual lifestyle needs – only you can determine that.
For the prospective homeowner, it is important you look at this number as a starting point – not the end point. Since it typically represents the maximum, start with this number and apply your own logic and budgeting to arrive at a number that’s right for you.
Either on your own, or with the help of your financial planner, take a look at your lifestyle and your goals and incorporate them into your planning.
Debt management and balance are keys to financial success, and as recent studies have shown, sound financial planning is linked to happiness.
Take a look at your other personal goals and lifestyle desires:
Do you want to comfortably get away on vacation every year?
Do you wish to change or upgrade your home furnishings?
Do you plan to contribute regularly to your RRSP for your retirement?
Do you plan to contribute regularly to your child’s RESP for their education?
Do you have special interests that are important to you, like boating, concerts, dining, or maybe a golf membership that require some additional disposable income?
Remember to leave yourself room to breathe and enjoy life.
It is possible to create a budget that includes providing a comfortable roof over your head, planning and saving for the future, while allowing yourself the ability to enjoy your favourite pleasures in life today. What’s more, it is this very cushion that also allows you a buffer when times are tough. You leave yourself in a much better position when the unexpected happens like a family health crisis or a job loss.
Getting the maximum mortgage available is very tempting at the time of house hunting because your home is top of mind – but don’t risk becoming ‘house-poor’ as they say. Getting mortgaged to the hilt may be fine if you’re happy sitting in your home on lawn furniture eating Kraft Dinner for the foreseeable future, but if you want to go to the Keg for dinner every now and then, enjoy a weekend at the spa, rent a cottage this summer, see a Leafs game with your buddies, buy some updated comfortable furniture for your family room, send your kids to university, and oh yeah, … retire comfortably at the end of it all, then you need to factor some of these things into your budget.
Take time to plan. You can find a balance for both your mortgage and your life.
Column appeared in Elgin This Month April 2011
Stephanie Farrow, B.A., CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning, and Certified Financial Planner designation. Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010 and hosts our Farrow Financial Blog and Twitter @farrowfinancial. Stephanie and her husband Ken Farrow own Farrow Financial Services Inc., are busy raising three young children and actively involved in the community. Our Farrow Financial Services Team.