I can afford what? Mortgage specialists are nuts

“You must be insane” is what we thought after our mortgage consultant told us what she thought we could afford. After talking to friends, I realized we were not the only ones. Everyone I know seems to have had the same reaction after visiting their bank. Mortgage specialists in general must be on some hallucinogenic that makes them see money everywhere. From what I here, the drugs are even more powerful in the U.S.

My husband and I bought what I consider to be an expensive home and since we made the decision, I have been freaking out. I’m one of those people that obsesses over decisions I already made. So since we bought the house, I continually check new websites to make sure we didn’t make a mistake and buy a house that is out of our means, even though we bought something well below what our specialist told us we could afford.

I’ve surfed financial blogs, governmental websites and everything I could find. In the end, I realized that I was not really content with any of the calculations people proposed. They are either way two generous with your house budget or way too strict. Here is a summary of the formulas to calculate what you theoretically can afford. I’ve added my comments, because well it’s my blog and I get to do that.

The most popular method of calculating what you can afford seems to be the 32/40 rule. From what I can tell, a version of this rule is what banks use to pre-qualify you for a mortgage, it explains their insanity. According to this principal, your monthly payments (Interest, principal, and taxes) should equal a maximum 32% of your gross monthly income as long as your total debt payments remain below 40%. I would add heating costs to this as we live in Canada and this can be a significant expense. For JF and I, the resulting payment was astronomical, way more that we ever figured we could pay without eating Lipton chicken soup for the rest of our lives. You can find a worksheet here to help you calculate what you can afford. I prefer it to calculators as it actually explains the calculation.


Based on the 32/40 formula, a couple with a gross income of $100 000 a year, who owns one compact car that they lease, should theoretically be able to swing a $2 500 monthly mortgage payment (assuming property taxes are about $3 000) or a 354 000 mortgage. However, after taxes, the couple is really only making around $65 000 a year or $5400 a month. Their house, utilities and car combined would take up about 65% of their realized income, and they haven’t eaten, clothed themselves, or paid for daycare yet, nor have they put a penny in savings. It does not seem realistic to me. If you followed this principal you would you nothing left for a romantic weekend or any type of fun activity for that matter. Forget the La Perla lingerie girls, it’s all going into your house. You can read more about how this does not make sense on the It’s Your Money blog.



The same blog that makes fun of the 32% and 40% rule proposes a much more insane idea. Your principal, interest and taxes should equal no more that 25% of your take home pay. So, if we take the same couple as before, there maximum monthly payment would now equal about $1000 (assuming again $3000 a year in taxes).
If as he suggests, they need to pay their house off in 15 years, this couple could afford a mortgage of about $165 000. Assuming they put a generous 40K down, they are looking at a $200,000 house. If you want to see what a $200 K house looks like in Montreal, the picture posted here is of a home in St-Laurent currently on sale for $199K. Keep in mind, the average family income in Quebec, for a couple, is around $55K, so imagine there lovely home if they followed that rule.

My suggestion, I like the idea of the 32/40 rule as long as you use your net income instead of your gross income. This is more realistic in my opinion as it deals with actual cash you will have on hand, not some fictional amount. Based on this, our couple can now look to buy a $290 K home without worry and pay off there mortgage in 25 years. That seems logical to me.

I also think it makes sense to look at your expenses and build a monthly budget based on your actual spending. This will help make sure the payments work with your lifestyle. If you love to eat out every night at the hippest restaurant or travel to exotic locations, it may make sense to spend less on your house and more on other activities. If you decide to buy a more expensive house, you will also be able to pinpoint what sacrifices you will make.

In the end, if you follow the first principal and are over, you’re probably screwed. If you followed the second, your financially fine and can easily afford the Raid you’ll need to fight those friendly roaches that you are sharing your house with. The third principal, well it’s my favourite because it’s about what we are doing for our home and thinking it’s the best method helps me sleep at night.

I promise less serious articles in the future.

Pam

Our Fireplace story

I’m a huge fan of fireplaces. I’ve spent so many nights as a kid warming up next to the Fireplace in the basement or my parent’s home or sitting by a camp fire. The smell, the sound, the heat, and the look of the flames that come with a fireplace make everything seem that much cozier and comforting. Not having one in our new house was really not an option for us, or at least for me. Some people insist on a big yard, a pool, a giant kitchen, I want a fireplace.

So I freaked when our contractor let us know that the gas fireplace and “to die for” mantle were no longer feasible. Well, at least not the natural gas one that we had in our contract. I had been told to expect things to suddenly be unavailable; we had expected the brand of the air conditioner to change, or maybe our tile for the bathroom to be out of stock, but a fireplace

No, out of all things it was the fireplace. Apparently Gaz Metro had changed the rules and was now charging $2K for the pipe for clients who did not have gas heating (it used to be free). If you are reading this and say: “yeah, well so what? It’s not your fault; make sure you read your contract. Our contract clearly stated that the contractor could replace items with other items of equal or greater value. But what exactly is the equivalent of a fireplace and what happens when the feature no longer available was a key factor in your decision process.

Our contractor’s suggestion, we will hook you up with a propane fireplace. When we checked into it, it turned out that a propane fireplace meant we had to rent a tank, get it filled and although I didn’t confirm this, even potentially increase our home insurance costs… equivalent my eye.

Anyway, we lucked out. My contractor turned out to be a fairly nice guy and we came to an agreement. We would change from hydro electricity to gas heating (including gas stove hookup, bbq hookup, and water heater) which he would provide at half the cost. We also found out he would be using our house as a guinea pig for NOVOCLIMAT

We are the first house they are building according to these new norms, and as a result, it’s free.

In the end, I think this worked out in our favor, but it took a lot of negotiating and preparing for it. Its always intimidating to negotiate when you have little to know clue what you are talking about. So far so good though.

See you by the fire

Pam

Quick update on the house

Here is our house. It’s gone up so quickly it’s been hard to follow. According to Jean-Francois, the superintendent, the brickwork should be done by Friday and they should have started the Gyprocking of the walls. The wiring and heating systems have been installed, as well as the plumbing.

Unfortunately, the construction holidays are approaching so whatever is not done by Friday will have to wait 2 weeks… oh well.

They are currently testing our house for air leaks as our house was upgraded to NOVOCLIMAT standards, YAY!, The housing equivalent of the energy star rating.

Since my last post we have had many adventures, and Oh yes, in most cases they were actual adventures:

-We finalized our interior choices (I’ve changed them many times)
-Had to deal with the fact that we could no longer get a gas fireplace
-Had to revise the kitchen plans over and over because we kept getting them
Wrong
-Met our wonderful future neighbohrs
-And learned a lot about construction, material, and what to do differently.

I just can’t wait till its done and we know that everything looks fine and there are no more choices, decisions, or negotiations. I am so anxious about how the kitchen will look.

I will give more details on some of our adventures shortly.

Pam