Overindulging

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Mom told me to buy a house, pay it off in 6 years and grow a family.  What mom didn’t tell me was that when she bought her house the price was only 3 to 4 times her yearly salary.  She also didn’t tell me she bought when interest rates were around 7 to 8 percent, nor did grandma have to fork over her life savings to help with the down payment.  Yes, dear Johnny boy, prices for houses used to be affordable in big cities and interest rates used to be 7 percent.  Things were different in the past, like how we used to have video cassette players, Walkmans, pagers and something we called real music.

Mom may be right about a lot of things in life, but you wouldn’t let mom choose your cellphone, or who you should date, or even what clothes you should wear on a daily basis.  Certainly she had her sense of style back in her day, but that was decades ago!  So what makes you think, so positively reassuring, that the best person to listen to for your own personal finances in year 2013, is mom?

If you live in one of the big cities in Canada like Toronto or Vancouver, no doubt you’ve experienced a surge in home values.  Where once stood a house that was valued at a mere $350k, it probably now sells for somewhere north of $550k.  Looking for a detached house in Toronto?  If you don’t have over $800k you better start your house hunting elsewhere.  Mom may have been able to pay off her house in 6 years because she bought it for around $300k in her heyday, but with prices so high, one can’t possibly pay off a house in such a short amount of time.

Shelter is no doubt a necessity of life, but at what cost are you willing to take in order to get yourself into the “house of your dreams”.  It’s no joke that the word mortgage derives from two French terms.  “mort” meaning dead and “gage” meaning pledge.  Taking a mortgage, however, shouldn’t mean taking a death pledge.  You should not be saddled with the responsibility of paying off a single asset in your life until the day you die.

Individuals need to practice common sense when making such a big purchase in life because taking out a large mortgage to purchase a home is a monumental personal financial decision.  As I have mentioned before, a bank is very comfortable giving out large loans as long as the individual has good credit history and has a proven track record of paying back loans in a timely manner.  This does not mean you should agree to terms of an oversized mortgage.

Before jumping in and signing your name on a mortgage, think carefully how much a $600k mortgage will cost in your lifetime.  Assuming interest rates stay at 3%, a loan of that size amortized over 25 years will mean that the total cost of the entire mortgage would total $819 415.31.  That is an astonishing amount of money.  Paid with after tax dollars in Canada, one would have to make over $1.2 million (est. 35% tax rate) dollars in their lifetime to pay off that house.   That also assumes that the person paying off the house would devote all their after tax income to paying the house.  No vacations, no vehicles, no restaurants, no utilities, no fun!

Is this the kind of life that would seem fulfilling and desirable?  To be under the term that most would call “house poor”.  When deciding on any large purchase, one should use common sense and determine how much the total amount of the purchase should be not just the monthly carrying cost.  It might be true that you can carry the cost of the purchase on your monthly income, but do you feel comfortable knowing that you will be paying that for 25 years?  Do you have goals of early retirement?  How does such a large purchase fit into your overall financial goals?

Most times in life, to reach a certain goal, sacrifices have to be made that have an impact on the things we want.  Perhaps that fifth bedroom isn’t needed, or maybe taking 15 minutes longer for your commute is still acceptable.  These are all hard decisions that have to be made when factoring whether such a large amount of debt is warranted.

Certainly buying a house is not something that should be condoned.  Buying a house that fits your overall financial goals should be the main financial criteria, not whether it fits into your monthly budget.  If you think carefully, there is definitely a difference between the two.  It is said that gluttony is one of seven deadly sins, and though it may relate to overindulging in food and drink, the same certainly applies to housing and mortgages.  Be very careful on assuming too much debt.

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2 thoughts on “Overindulging

  1. Pingback: Setting a Target « Financially Yours

  2. Pingback: Making It To The Finish Line « Financially Yours

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