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 The
Money Management Newsletter: Home
Ownership
Over-Extending Yourself Financially:
The quickest way to destroy the excitement
of owning your own home
Home Ownership Editor & OCNA
Special to Money Management Newsletter
Your dream home becomes a nightmare when you end up
"house poor" with most of your money going to pay for the mortgage and
little left over for enjoyment. When buying a home, you need to be practical
and realistic. Over-extending yourself financially is the quickest way
to destroy the excitement of owning your own home.
Whereas a real estate professional can help you find
the home of your dreams; a mortgage broker or realtor can also assist you
in evaluating mortgage options and obtaining financing at the most attractive
prevailing rate.
In the meantime, here are some ways to determine your
"affordability quotient." Setting a maximum price range is more important
than simply establishing an upper price limit because unanticipated costs
could push you into the "house poor" danger zone. To determine your affordability
price range, you must calculate two amounts, the amount of cash you can
afford to put towards the purchase (the down payment) and the maximum
amount of loan (mortgage) you can comfortably carry.
A mortgage covers the difference between the purchase
price and your down payment. The larger the down payment, the less you
have to borrow, the smaller your monthly mortgage payment and the lower
your cost of interest over the term of the mortgage. So it probably makes
sense to put down as much of your own money as possible. You should keep
a cash reserve for unexpected expenses and such typical "post purchase"
expenses as land transfer tax, legal fees, mortgage arrangements, moving
expenses, new furnishings and appliances. The first step towards establishing
a maximum mortgage limit is to calculate a monthly payment you can afford.
Financial institutions do this by calculating your debt-service ratio.
To calculate your debt-service ratio, list all your loans (car, personal
loans, monthly credit card balances). The sum of these loan payments and
your mortgage payment (including principal, interest and taxes) should
not exceed approximately 40 per cent of your gross income. The mortgage
payment and taxes should not exceed approximately 30 per cent of your
gross income.
The size of the mortgage you can arrange, based on payments
you can afford, depends on interest rates. The lower the rates, the larger
the possible mortgage and the more affordable the housing is. But there
are other mortgage terms to consider as well. How open is the mortgage?
Would prepayment be allowed? Is the mortgage affordable? Discuss your
mortgage options with a mortgage broker, your banker, financial advisor
or a realtor.
Establish a limit and stick to it. The usual source of mortgage funds
is a lending institution that determines the maximum loan allowed. But
there are other sources of funding, too and a realtor can help you choose
the best lender at the best rate and terms.
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