Save your stretching for after a run or workout. When buying a home, do not stretch your finances.
There are a bunch of sensible rules for aspiring first-time home buyers: Have a first home savings account, pay off or at least reduce existing debt, attend to your credit score, get pre-approved for a mortgage as you start looking seriously for a property and budget for closing costs as well as a down payment. All these rules are superseded by one additional piece of guidance: Spend less than the maximum amount set out by your lender. Cheap out, in other words.
In the 2000s and 2010s, the decades of wild home price appreciation, stretching to buy a home was theoretically justifiable in that you were building equity by the minute. In the time it took to make dinner, your home might have gone up a few thousand dollars, depending where you lived.
Housing prices peaked in early 2022 on a national average basis and the most expensive cities are now seeing declines or stagnation. Less pricey locations are still on the rise, but a recession would take care of that in a flash. People who struggle to carry the cost of home ownership may no longer have the solace of knowing they are getting richer on paper.
The “on paper” qualification here is important. Rising home equity does not help pay the bills, unless you tap into your home equity with a line of credit and pay interest monthly.
Housing affordability overall is in terrible shape in many Canadian cities and some people will have to extend themselves to the maximum to buy any sort of home at all. But if you can, buy less than you can afford and plan to live there for at least five to 10 years.
Spending less than you could gives you financial flexibility, a precious commodity for young homeowners. You could build an emergency fund, start retirement saving and spend on vacations or modest renovations without adding debt. And you could make extra mortgage payments.
Buying a smaller or more modest home means compromising somewhere – square footage, number of bedrooms, size of yard and so on. You’ll feel the offsetting benefit of financial flexibility every time you pay your mortgage.
From our readers
Today’s financial tool
A wedding budget worksheet.
