Most people dream of owning a home. It gives us a sense of pride and accomplishment that is one of the most amazing feelings in the world. Without a doubt owning a home is something to be extremely proud of but without knowing it people can over leverage themselves and become extremely “house poor”.
I am not going to go all Gail-Vaz-Oxlade on you and give you financing 101, but before making a purchase you should evaluate the kind of person you are and the lifestyle you would like to live before purchasing a home.
Banks will approve you for a mortgage based on your total debt service ratio or your gross debt service ratio. Basically, they are taking your income level and assessing whether or not it can support monthly mortgage payments and housing costs. A bank may approve you for a $600,000 mortgage based on your income level, but that doesn’t take your lifestyle into account.
Who doesn’t like shopping, nice restaurants and vacations? We all like to spoil ourselves but unless you have a money tree (that would be really amazing) it is likely you are going to have to trim back your spending in certain areas. The good thing is that it is pretty easy to assess whether or not you are ready to take the leap.
By tracking your spending over a three month period you will get a pretty accurate reflection of where your money goes. RBC even has a product called Finance Tracker which breaks all of your expenses down into categories and helps you see where your money is going. If you combine your discretionary spending with your estimated mortgage payments you will be able to see if you can live your current lifestyle and own a home.
In most cases you will have to make adjustments to your spending habits and ask yourself “which things can I do without?” I am a home owner and a father and I have learned there are many things that I can do without that really don’t affect my overall lifestyle. I can’t buy Prada shoes and Canali suits every year, but owning a house trumps those luxuries.
I know some great mortgage brokers and financial planners who can help create your customized plan for you. If owning a home is something that you see in your near future then you should take these steps to see if you can have your cake and eat it too.