House Rich, Cash Rich: You Can Have it All - Part 1
Eric Putnam
Burlington Post
June 2009
Dreaming of your own home? By doing a few smart things now, you can be house rich and cash rich.
Part 1: Plan to Make your Dream Home Come True
Before Al and Inez went house hunting, they made a smart move. They created a financial plan for the home they wanted to buy. When they later contacted a real estate agent, they knew exactly what they could comfortably afford. And when they closed the deal on their first house, there were no sleepless nights – just confident celebration of their dream home.
Anyone can do what Al and Inez did. By taking just a few hours to create a plan before going house or mortgage hunting, you can eliminate the stress of purchasing a home that could make you house rich, but cash poor.
Start by determining how much of a down payment you can make. The higher it is, the smaller the mortgage you’ll need and the more affordable your monthly payments will be. If your down payment is less than 20% of the purchase price of a property, you’ll need mortgage loan insurance. The premium is calculated as a percentage of the loan and is usually added to your mortgage payments. This insurance could increase your mortgage by as much as 3% or more depending upon the portion of the purchase price the mortgage represents and the length of the amortization period. So the more money you can put into a down payment, the less you will have to pay for your home. If you have an RRSP, consider whether to use some of it. You can borrow up to $20,000 tax-free from an RRSP to buy a home.
Next, determine how much mortgage debt you can afford – the maximum monthly payment you can comfortably carry. Consider that monthly payments for mortgage principal and interest, property taxes and utilities will have to be less than 32% of your gross household income (total income before taxes). That’s the limit at which most lenders will provide a mortgage.
Now you can figure out the mortgage amount for which you will qualify. This is generally based on your income, monthly expenses and down payment. Check out some of the online tools that can help you calculate this, such as AIG United Guaranty Mortgage Calculators or Genworth Financial Canada .
But don’t rely on these tools alone. Be sure you can also manage the other costs involved in buying and running a home. One-time expenses might include: property appraisal, home inspection fee, legal fee, land taxes, mortgage insurance premium and application fee, GST for a new home purchase, moving expenses, utilities, appliances, furnishings, renovations/repairs, and home maintenance equipment. Monthly costs might include property insurance, property taxes and condominium fees.
Make a list and estimate these costs. If you don’t know how much certain expenses might be, ask family or friends who own homes, a local real estate agency or a builder representative.
If your purchase is months or years away, start a dream home savings account now and make monthly contributions. Before you know it, you’ll have a nest egg that can make your dream come true.
Planning ahead will help you purchase a home that fits your lifestyle and your budget. After all, isn’t that what owning a home is all about?
Eric Putnam is a senior advisor with BDO New Beginnings (www.bdonewbeginnings.ca) and Joyce Brown is a counsellor with BDO Dunwoody Limited (www.debtworries.ca). Both help individuals resolve their financial problems. You can reach Eric at 1 (866) 926-4700 or eputnam@bdo.ca and Joyce at (905) 524-1008 or jbrown@bdo.ca.
