THAT’S A NICE CAR! CAN YOU LIVE IN IT?
Canada is a massive country with specks of dense, populated areas. Because of this, getting around can only really be done two ways; air travel and cars. With prices of cross-country plane tickets more than a monthly mortgage payment, car travel is the number one means of transportation.
But does getting around mean you have to buy that brand-new Platinum version SUV? Signing on that dotted line at the dealership could affect the size of home you could live in now or in the future.
THE EASY SIDE OF CAR FINANCING
Car dealerships are great at marketing cars. The TV, radio, and other ad spots no longer call them “used vehicles”; they’re “pre-owned”. It’s not a $60,000 pick-up truck, it’s a $199/week truck with “zero percent financing.”
And don’t even get us started about how easy it is to obtain financing for vehicles. To obtain a mortgage, we have to have stacks of documents to prove your income. To get a car? Mention a ballpark figure and that will be fine. The car will be ready tomorrow.
Because of these reasons along with many more, we see clients on a regular basis who have ridiculous vehicle payments in comparison to their income and financial situation. A car payment on a credit report shouldn’t make us look twice as to whether that’s a client’s mortgage payment or not!
BUYING THE NEW CAR NOW COULD MEAN POSTPONING YOUR NEW HOME
Although buying that shiny, great smelling new ride was almost too easy, making the math work for your mortgage pre-approval after may not be as easy.
A ‘low’ car payment of $389 bi-weekly equates to roughly $142,000 more in a home price you could afford without that payment.* To compare, as of February 2020, the average price of a single-family home in Edmonton was $355,002. That car payment could be the difference between buying a condo and getting a detached home!
But, why the huge gap? Qualifying for a mortgage not only involves how much your mortgage payment is versus your yearly income it also involves your other monthly obligations like property taxes, heat, credit card debt, and, oh yes, car payments. This also includes lease payments. The monthly lease payment on the vehicle is still likely to affect the size of the mortgage you qualify for.
YOU’VE QUALIFIED BUT DON’T BUY THAT NEW CAR…YET!
We have seen this more times than we have liked to count. After a client is pre-approved and shopping for their dream home, the excitement of purchasing leads to other exciting purchases, like buying a new car.
As mortgage brokers, this is like listening to nails on a chalkboard. As in the example above, the car payments will affect the amount you’ve qualified for, even after you’ve been pre-approved. Since the vehicle wasn’t listed on the initial pre-approval, you will have to go through the process again and likely, be pre-approved for a smaller amount.
This can cause a lot of stress as you get closer to finding the right home. We always suggest holding off on making any big purchases during the house buying process and even after you’ve moved in. You may have your dream home, but you still need to make your mortgage payments.
FINDING THE RIGHT CAR AND THE RIGHT MORTGAGE
All of this doesn’t mean you can’t go cruising in the set of wheels you’ve dreamed about since you were a teenager. Like most things in life, it’s about balance.
Talking with a mortgage broker can help you figure out what this balance looks like. They can not only do the math to give you your options but may be able to suggest other tips. Just hold off on buying the Mercedes till we talk, OK?
*Based on Jan 2020 benchmark rate, 25-year amortization