Will upsizing make you house poor?
With mortgage rates so low, you might be tempted to get a bigger home, but should you?
First, there are a few steps to take before calculating how your furniture will fit into a bigger space.
When I sat down with my personal financial planner, he said it would take just a few minutes to figure out if I could afford the new costs without becoming house poor. In the current market, he advises the maximum a person should dedicate to housing should be 50 per cent of net income: However consult with your own mortgage broker, bank or financial advisor before making any big decisions.
Gather all the numbers
I was told it's important to look at one's individual scenario and while most banks still use gross income when calculating mortgages, be honest with yourself and use the net.
Once you've figured out your monthly net income, the next step is to gather all related financial information, such as square footage, property taxes and maintenance fees (if applicable) for the bigger property. This will be available from the MLS listing.
Calculate the numbers
Using those numbers, you can figure out how much you would be paying per month on these fixed costs. Other monthly expenses, such as heat and hydro, can be estimated from a quick conversation with the selling agent.
Figure out your ceiling
Once you've got your monthly net salary, figure out your ceiling or what you would be willing to spend on a bigger property: Remember, you'll need 20 per cent for a down payment. Then, deduct that 20 per cent from your ceiling number--for example, if your ceiling number is $260,000 and the 20 per cent down payment is $52,000, then the mortgage will be $208,000.
Calculate your mortgage
Use a mortgage calculator to figure out how much you would pay per month or biweekly on a five-year fixed rate. This number, plus any aforementioned monthly expenses, will be your fixed monthly fee. Your property taxes can be added to this depending on your payment schedule.
This is also the time to work with a mortgage broker to determine how much you would qualify for if applying for a new mortgage.
Will your salary cover the difference between your current monthly costs and the new costs should you decide to upgrade?
Finding the down payment
So now that you know how much your bigger place will cost you, you need to figure out how you're going to get the down payment.
The first thing is to estimate for how much your current property could be sold by checking comparable home sales in your neighbourhood. That amount, minus fees and the cost of the remaining mortgage, will make up the down payment.
If you need to make up the shortfall to get to 20 per cent, put your plans on hold and save the down payment by putting aside a certain amount per month. The shortfall, divided by the monthly savings, will give you your timeline.
It sounds a bit daunting but with the help of my financial advisor, a pen, paper and an Internet connection, these calculations took 20 minutes. The goal is to figure out how to get into a bigger place without being house poor: What's the point of getting more space if you can't enjoy it?
Renee Sylvestre-Williams is a writer in Toronto.