News flash: it’s expensive to buy a home in Toronto. The average price of a detached house is over $1.2 million. The lack of supply of detached houses means there’s upward pressure on the price of condos, too. Housing affordability is so much of a hot-button issue that the provincial government is considering introducing a foreign buyers in Toronto similar to Vancouver to cool the market.
Why You Should Get Pre-Approved for a Mortgage
It’s hard to go house hunting if you don’t know how much house you can afford. That’s why it’s a good idea to get pre-approved for a mortgage if you’re serious about buying a house. A mortgage pre-approval tells you the maximum amount lenders will approve you for a mortgage, along with your maximum purchase price. Getting pre-approved just makes sense – it helps you avoid overbidding on a property and having your lender reject your mortgage application, which can cause you to lose your deposit and possibly get sued.
While a pre-approval is a good first step, it’s only that, a first step. Many homebuyers make the mistake of accepting their pre-approval amount at face value without considering how it will affect their monthly budget. For instance, just because the bank approves you for a certain amount doesn’t mean you should go for the max approved. Rather you should work within what mortgage monthly amount you can pay with a built-in buffer for rate increase (over a million Canadians couldn’t handle a one percent increase in their mortgage rate, according to TransUnion) and work back words from there to the total mortgage amount after considering your down payment. RateHub has a handy mortgage calculator. You can enter your mortgage amount along with the mortgage rate to determine what your monthly mortgage payment would be and work backwards from there.
For example, let’s say your bank approves you for a maximum purchase price of $800K. A lot of homebuyers will go out and spend that much (sometimes even more). This can be a recipe for disaster, especially if you haven’t taken the time to run the numbers to see what your mortgage payments would be. Your real estate agent and banker aren’t going to tell you to spend less, as a higher purchase price means a higher commission for them. You might discover you can find a house with all you need for $750K. A lower mortgage means you can have your mortgage burning party that much sooner.
Why Bigger isn’t Always Better
Not convinced that bigger isn’t always better? A bigger home comes with higher utilities, property taxes, home insurance, maintenance and repair costs. You won’t want to leave those extra rooms empty, so you’ll spend more on furnishing. By spending more on housing-related costs, you’ll have less money to save in your TFSA, RRSP and RESP. You could also find yourself “house rich, cash poor,” with little money left to cover monthly expenses, let alone go on a vacation.
It’s important to work with a mortgage broker and a financial planner so that a house does not become a burden for you. We have a team of experts who can help you make the right decision. Sit down with our team to determine how much you can truly afford to spend on a home without crimping your lifestyle. Feel free to contact our office today.