Embarking on home ownership is a big responsibility, and so is the mortgage that comes with it. Here in Greater Vancouver we've seen enormous media coverage lately on the skyrocketing price tag of real estate, not to mention the controversy surrounding tear-downs going for well into seven figures and bidding wars that came as a result of multiple offers on the same property.
All this is more than enough to fuel doubt, but before you opt out of the real estate game entirely, give some thought to the following considerations.
Sound financial planning, a realistic budget and a few good habits will go a long way to ensuring your mortgage is affordable. Here are five practical tips to get you started.
1. Work Backwards
Visualize your budget as a single invoice that includes all your monthly expenditures, including debt payments, as a total. Work backwards through your costs, and be honest about where your money goes and what you have leftover to contribute towards housing costs which should include your mortgage payments, property taxes, condo fees and heating.
2. Make The Necessary Changes Now
If you are making changes that will allow you to afford a larger home, make sure these are firmly in place long before you move. Dealing with change while buying a home not only adds undue stress, unexpected snags often arise which can complicate the process further and leave you mentally and financially drained.
3. Place Your Bets On A Sure Thing
Buying a home with the hope that your current situation will change is asking for trouble. Be realistic about your existing financial status. That way if you don't receive that pay increase or promotion you've been hoping for, you will not be left scrambling to make payments or be in danger of losing your home. If you are purchasing with hopes that your partner will contribute down the line, make sure to have those conversations ahead of time. In reality you should get something you can afford on your own unless you are both willing to assume the risks of the mortgage.
4. Continue to Contribute
Many people forget about their savings once they have a mortgage. But contributing a set amount every month into your savings creates a healthy financial habit, and will provide a cushion if ever you are in need. Especially in condos, a special assessment can be a costly surprise and may leave you without any options but to sell if you do not have funds saved for a rainy day. It is important to have a safety net outside of your mortgage. Although paying down your mortgage quickly is great, don't forget about other savings.
5. Slow and Steady
Choosing a longer amortization initially can help you in the long run. This will allow you to make lump sum payments, and you can increase your payment frequency to decrease your amortization in the longer term.
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Before any fun can be had, it's best to use that remaining money to pay off any and all remaining debts that may be outstanding, starting with the debt with the highest interest. At the end of 2012, the average consumer debt load in Canada was $27,485 — a six per cent increase over the previous year and the fastest increase since 2009. Sure, such financial housekeeping seems boring and monotonous, but you'll thank yourself later. After all, financial freedom when other debt still hangs over you is nothing but a facade and the longer such debt is avoided and ignored while you live the high life, the sooner you'll be in an even deeper financial hole.
A number of financial experts and personal finance articles recommend paying off your mortgage before investing in your retirement, but once your mortgage is paid off, why not allow the money you are now saving to grow even further in an investment to put towards retirement? There are always a number of investment options to choose from, whether it be high risk high reward stocks, GICs, savings accounts, or mutual funds. What you choose is dependent on your risk tolerance and investment knowledge and your risk tolerance depends on how long the money will stay invested. More time means you can afford to take higher losses, but if you plan to cash out, you'll want to keep your losses to a minimum.
Once all outstanding debt is paid off, it's time to have some fun and live your dreams. An around the world ticket can be purchased through travel websites for less than you may think. The cost is determined by the number of countries you plan to visit, the class of your cabin and the total mileage the plane will be traveling. You'll also want to consider the flexibility that your trip allows and possibly using discount airlines, buses, or trains for shorter distances on your trip if money is still a main concern. An around the world cruise is also an option if money is no object and you want to live it up, with costs dependent mainly on your steerage class with trips ranging from $20,000 to over $100,000 depending on the cruise line and the type of room chosen.
Maybe you hate your job or maybe you just want to spend more time with the family; either way, no longer having the financial burden of a mortgage means you can start working the way you want. You can plan to retire sooner, thanks to all that extra money, maybe consider working part-time or even reinvest in yourself by changing jobs and doing what you always wanted to do or starting your own business and becoming a true entrepreneur.
Depending on how early you get your ducks in a row, paying off your mortgage may line right up with your kids, or possibly your grandchildren, going off to university. With the cost of tuition and living on your own being around $80,000, the kids will need as much help as they can get. If your kids have yet to reach university age, you can use your extra funds to make the maximum RESP contributions, as often paying a mortgage is a major barrier to parents making the real impactful contributions they want to their kids' education.
You may want to take that extra money and reinvest in your home. Those long planned renovations you always wanted to do can finally be moved to the forefront now. It's a great way to increase the value of your home if you sell it down the road. You could even put the renovation expenses on a line of credit and pay them off like you did your mortgage for a time.
Speaking of selling your home, many retirees realize that their home is actually more spacious than they need it to be, so it's common for many of them to downsize. The money you save from the sale and subsequent downsizing will only add to your financial options. The world is your oyster; now go out and claim it!
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