A few weeks ago, a real estate agent came to our door. He gave us his card and asked us to call if we were considering a move. He’d recently sold several homes in the area, including the same model as ours. They had all received multiple offers, with bids at or above the asking price. The housing market turnaround seems to have come so quickly. At this time last year, my husband and I were wondering how low our house value could go.
Low interest rates are leading to a rebound in house sales in many areas of the country. I know a few couples recently disappointed to be on the losing end of a real estate bidding war. In my neighbourhood, homes are selling on the first day of listing, before the “for sale” signs are even posted.
For those navigating today’s rising real estate market, it’s easy to get caught up in the frenzy. First-time buyers are anxious to take advantage of historically low interest rates, before they get priced out of the market again. Even experienced buyers can succumb to the heat of the moment and pay more than they planned for the home of their dreams.
The best way to avoid paying more than you can afford is to be prepared. Before heading into that open house, figure out how much of a mortgage you can afford. There are some handy rules of thumb. Your monthly housing costs, including mortgage payments, taxes and heating bills, shouldn’t exceed 32 per cent of your gross monthly household income. You also want to make sure that your entire monthly debt, including credit card and car payments, does not exceed 40 per cent of your gross monthly income.
There are many online mortgage calculators to help you navigate the numbers. I like this calculator on the Canada Mortgage and Housing Corporation (CMHC) website, as it allows you to factor in different amortization periods.
The figure that the calculator spits out might surprise you. It’s likely show that you can get pre-approved for a much larger mortgage than you expected. But be careful.
You need to make sure that your mortgage isn’t going to sacrifice your lifestyle, says Paula Roberts, a mortgage broker for Mortgage Intelligence and a member of the Canadian Association of Accredited Mortgage Professionals (CAAMP). "When you finally have a house, you don’t want to feel like you can’t afford to go to Starbucks.”
Roberts recommends taking an honest look at your expenses. Do you like to go out to movies and restaurants? You need to consider your spending habits before committing to a monthly mortgage payment.
While it’s tempting to search for homes at the top of your affordability range, you also need to keep some cushion in your housing budget.
An easy way to create wiggle room, suggests Roberts, is to register for a mortgage with a 35-year amortization, but make payments as though it had a 25-year amortization. “You can always decrease the payment if other expenses arise.”
While Roberts says that many of her clients don’t like the idea of a 35-year mortgage, the maximum mortgage term available, it offers flexibility in the event of job loss or other life change.
Don’t forget you’ll need cash to cover the basic costs of home ownership. Annual maintenance and repairs typically cost between one and two per cent of your home’s purchase price, depending on the age of the house.
So how do you stick to a sensible mortgage budget in a seller’s market? Roberts tells her clients to calculate how much each additional $1,000 in purchase price will add to their monthly payments. That way, if they enter a bidding war, they’ll know exactly what each incrementally higher bid will cost. “After all,” she says, “you don’t want to lose a house over an extra $5.37 a month.”