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First-time buyers: Live like you own it

Have you ever thought you were in over your head? A situation so uncomfortable you feared you had made a wrong decision? Perhaps it was starting a new job, or moving to a new city. Or how about that sinking feeling known as buyer’s remorse? During a shopping spree, logic can often take a back seat to emotion and practical need is replaced by want. This ailment is also known as the BBD (bigger better deal). Rather than buying something that we know is within our price range, we set our sights on something higher and work to get it at all costs. Long after the thrill of the buy is done, reality sets in, often followed by regret and disappointment. Thankfully, for most purchases there is a window of time that usually gives you a way out. Buy almost anything these days and it will come with a return policy, a fail-safe solution for an item that was defective, not needed, or outside your budget. The same cannot be said for buying a home. Unlike a new shirt, when purchasing a house you are not able to try it on for size. But what if there was a way to tell if buying a home was the right financial fit before signing on the dotted line? Normally, a first-time homebuyer will talk with a mortgage adviser to determine what their lender will approve and then proceed to search and eventually purchase a home within those parameters. The process itself is nothing new, but it relies on the borrower to know their own budgeting limitations beyond housing payments. When it comes to real estate, especially if you watch any of the popular home shows on TV, it certainly appears that a bigger house is a better house. However, just because you can be approved for a purchase up to a specific amount does not mean that you’ll be comfortable with the payments.

Let’s assume you are currently paying $1,350 a month in rent and get pre-approved to purchase a home of $400,000. Naturally you are super excited; you tell all your friends, and several weeks later they are throwing you an amazing housewarming party. Even the neighbours stop by to welcome you to the block. After a few months of making those new housing payments, though, you discover that there isn’t as much money left over to do the things you used to enjoy after all the bills are paid. Eating out, playing a round of golf, or spending time at the mall shopping and taking in a matinee are only fond memories. So why does it feel like your money is evaporating? Using the example of the above purchase price; a five-year fixed rate, and a minimum down payment of five per cent, the mortgage payment would be 1,863.04 a month. Add to that property taxes, utilities, and miscellaneous maintenance costs for an extra $325 a month, and your total housing expense is approximately $2,188. This means you are now spending $838 more each month than you were as a renter. Instead of leaping enthusiastically in to this major purchase directly after getting a pre-approval, it might be worth it to try living like you own it.

The strategy? Find out what the mortgage payment, property taxes, and additional utilities costs are for the home in your price range. Next figure out what the difference is between this amount and what you currently spend on housing. Set aside this difference into a separate savings account each month and if after three to six months you are still OK living within that budget then you are better prepared to buy a home in that price range. As a bonus, you also have some extra funds in savings that can be used for moving, or feathering the new nest. Before taking the plunge of buying your first home and potentially getting caught up in all the excitement, remember that just because you are able to obtain an approval does not mean that you will be happy with the total monthly costs. One has to consider if the increased financial strain of the BBD will be worth the stress caused on you and your family. There are tons of tips and tools available to potential homeowners online but there is no substitution for taking your time to determine if the amount you are approved for and the actual costs are aligned with the lifestyle you wish to live. Being mindful of this will help you avoid owning a great new house, but drinking cheap wine.

Source: Brandon Scott is a licensed & accredited Mortgage Broker based in Edmonton, Alberta. This article was originally published in the Edmonton Journal on May 1, 2014