Your relationship has survived the income gap, right? Get ready for adding a mortgage into the mix. Let us explore how this can affect your relationship. Here are some solutions to a situation I encounter often with my prospective clients. Remember, buying a home is most likely the largest purchase of your life, it will have a profound effect on your life, spending habits etc. Here are some ways to keep yourself above water for the first most difficult five years.
In the previous article, The Income GAP, we continue with our couple AB. Person B, after years of trying to keep up with Person A, has little to no savings, and often is carrying some debt. This is where things can get very sticky if you have not put some care in avoiding the income gap problem. We can see in the graph below just how profound an effect this “keeping up with your partner” has on the spouse with less income. I kept all variables the same except the monthly debt. In Scenario 1 I used $3000 (or 30%) debt load versus scenario 2 where I used $2000 (or 20%). WOW! Imagine spending $200 000 more (or less?) on your house? Remember that 120$ per month on a mortgage can get you about $25 000 while the same $120 on a personal can get you $7000. All the small seemingly insignificant debts penalize your borrowing capacity far more than you realize.
Therefore, that couple of thousand dollars on your credit card, that line of credit, oh and that personal loan you have accumulated now have derailed your plans of:
1. Getting into the neighbourhood you want.
2. Not getting the house of your dreams.
3. How to explain this to your partner?
I believe it is better to prevent a disaster versus damage control, however, what if you do not have that luxury anymore? What if you are in this mess? What if your landlord has decided to put a family member in your apartment and you have a little one in the oven? Keep calm and keep reading, there are ways to address this, consider the following:
1. Rent a bigger place. You may be thinking to yourself “Thank you Captain obvious” however, with all the societal and family pressure, it may not come so easily. Everyone around you is whispering in your ear, “What will people think if you do not buy a house?” Realize there is a profound difference between never and not right now.
2. Build a team of professionals to get the job done. As I mentioned above, this is likely the biggest transaction of your life, surround yourself with professionals that can work together to accomplish your goals in the most painless way. Look for an article on this coming soon!
3. Include your debt with your mortgage payments. There are certain programs that may be able to get this accomplished. Speak to a mortgage professional about a cashback mortgage. Discuss the eligibility criteria as well as which lender offers this type of solution.
4. Take advantage of the Home Buyer’s Plan. For first time home buyers, you may be eligible to withdraw up to $25,000 from your RRSPs tax free for the purchase of your home. See CRA website for more details. Talk to your financial professional about this to explore the pros and cons. Do not have RRSPs? There is no better time then now to start. Talk to your financial professional about an RRSP or TFSA loan and how it may be a good option for you.
5. Buy the home you can afford versus the home you can pay for. There is a subtle difference and yet this subtle difference has a huge financial impact. The house you can afford considers your lifestyle and spending habits. How often you like to go on vacation, the types of vacations, or some of the more important hobbies you may have. The house you can afford means you can have it all. Paying however is simply looking at the amount the lenders pre-qualifies for your home purchase. This does not consider lifestyle, only income, assets, debts. Only professionals that can guide you and show you all the pro and cons can truly get you to where you want to be.
There needs to be a lot of honesty and due diligence when you begin a serious relationship. Assuming you both want to progress together, these are important discussions to have. Introspection is also very important to ensure you also get what you want. What are some of your non-negotiables when it comes to a home? How important is your affordability versus paying capacity? You and your partner may not have the same perspective on this. It is important to talk about it. A house purchase can be a mathematical equation or a process by which you get the most for your dollar and get to keep doing the things you love to do. You choose!