Comments on the moneygardener: how much can we afford?

Banks are always happy to supply the rope for you ...

2009-06-19T10:31:22.891-04:00

Banks are always happy to supply the rope for you to hang yourself with if you so choose. (as we have seen-literally-down south.) I've always thought mortgage calculators should include questions about the number of kids you have, etc. (and whether or not you plan to enroll them in hockey!)

Astin, $2,600 per month after mortgage payments a...

2009-05-28T11:33:14.525-04:00

Astin,

$2,600 per month after mortgage payments and some utilities for a couple who lives in a ~$500,000 house?

$400 car payment (just one car)
$600 day care (assume one kid under 5)
$225 car insurance (two cars)
$150 cable/phone/internet
$400 gasoline (two cars?)
$600 groceries
$50 home insurance
= $2,425

This leaves $175/month for:

Clothes
Gifts
Haircuts
Vacations
Home Repairs
Entertainment / Dining Out
Car Repairs
Appliances
Furniture
Diapers / hygeine products
RESP contributions
Gym Fees
Sports Fees
Etc. etc.

Doesn’t seem like plenty left to me. I don’t think this couple would have to be wasteful to go into negative territory each and every month.

And then take that mortgage and recalculate it at ...

2009-05-28T11:21:54.469-04:00

And then take that mortgage and recalculate it at 6-8% (or more) in 3-5 years. With interest rates so low right now, this causes the payments to jump considerably.
This, to me, is the scariest thing about all of these big mortgages being issued right now. Central bank interest rates won't stay at 0% forever!

I agree, banks seem to want you to borrow far more...

2009-05-28T10:34:10.695-04:00

I agree, banks seem to want you to borrow far more than you can actually afford (pay for and afford are two entirely different concepts).

When I was shopping for a house just two years ago I had an income hovering right around 40K, and the bank had sent me a letter stating that about 145K would be the maximum I could afford. I ended up purchaseing a house for just over 100K instead. I'm incredibly glad that I did with the way things worked out in our family and the finances.

I think the old rule of thumb that the mortgage should be no more than 2-3 times income really works well. More people should know it, but it's not in the best interest of real estate agents, mortgage brokers, banks, or anyone else involved to teach it.

What's wrong with that number? It's 31% of gross ...

2009-05-28T10:05:22.025-04:00

What's wrong with that number? It's 31% of gross income under accelerated bi-weekly, which is below the maximum a bank will allow you to put towards a mortgage.

I'm not saying it's sensible, but it's certainly the industry standard in Canada. On top of that, since you already took out taxes, utilities, and retirement planning from their numbers, you're still leaving them with roughly half their NET income to use for various and sundry items. $2600/month in free-and-clear money, or $31,200/year seems like plenty to cover broken furnaces, reasonable vacations, and family costs, unless it's a very wasteful and excessive couple. It's not like the furnace breaks down every month.

Great topic MG! I think far too many people simpl...

2009-05-28T07:47:39.554-04:00

Great topic MG!

I think far too many people simply assume they can afford whatever the maximum the bank will give them, ~30% of gross income allocated to their mortgage payments. I took a different perspective with my first home purchase.

My income, the larger amongst my fiancee and me, HAS to cover all our monthly expenses (mortgage, utilities, insurance, car payment, misc, etc) and hers is 100% savings. Far too often I think couples try to "live within their means" on a dual income.

I got preapproved for significantly more mortgage than I needed, but that doesn't matter to me. If my future wife decides to stay at home with our first child I want to ensure that our monthly expenses are covered by my salary after taxes. If I go beyond that amount my view is that we're living beyond our means. Savings is the key to financial success because of what it allows you to do: pay off debt.