Eligibility vs. Affordability:The Mortgage Trap Most First-Time Buyers Fall Into

I've often discussed about this topic with multiple mortgage clients of mine and feel this deserves a standalone post. Just because a lender approves you for a certain amount doesn't mean you should take it. Let me define these terms

Eligibility is what the lender calculates you can afford based on standard guidelines: your pre-tax income, property taxes, condo fee, current interest rates and other ongoing loans (car payments etc).

The limitation of this formula is that it doesn't account for life outside your dream house. Your other expenses such as grocery, fuel, insurances, investments, daycare costs, or that annual family vacation!

Affordability is what you can comfortably manage while still building wealth, maintaining savings, and preparing for life's inevitable expenses. A mortgage should enhance your financial position, not consume it entirely.

Before Maxing Out Your borrowing capacity, Ask These Critical Questions:

1. Will you still save and invest? Can you invest at least 15-20% of your take-home pay after making mortgage payments? A home is a valuable asset, but it shouldn't be your only one. Your RRSP, TFSA, and RESP shouldn't become empty acronyms because of your mortgage payment. In fact, building back up these accounts should become your no.1 priority as soon as you close your house.

2. Is your emergency fund robust? Because, trust me, your furnace doesn't care about your bank balance, and job security in Canada is a myth. If you don't have a minimum of 3 (make it 6 if you have kids) months of expenses saved, then it's not a bad idea to wait till you have it.

3. Have you budgeted for higher rates? With variable rates coming down and becoming more popular, a mortgage that feels "affordable" at 4% might have you stocking up on ramen noodles at 6% as a lot of FTHBs found out in 2022-23. Your future self will thank you for leaving some financial breathing room. Plan for it.

4. Are you fixating on the rate in the short term instead of longer strategy? I'm not saying that you shouldn't go for a lower rate but evaluating a mortgage holistically may end up saving you much more in the long run. A 0.05% rate difference won't change your life, but sub optimal terms and conditions might! For a $500,000 mortgage, that's about $14/month – you may actually be wasting more money in avoidable/optimizable expenses like your bank's monthly account maintenance fee, phone bill, credit card fee or that gym you haven't set foot in the last 3 months.

The Real Cost of Being "House Rich, Cash Poor"

Many Canadians own homes worth hundreds of thousands but are 1 emergency away from financial and mental break down. Don't be that home owner.

Most financially prudent homeowners understand these points therefore they -

• Purchase below their maximum borrowing capacity

• Maintain substantial emergency savings

• Continue investing throughout their mortgage term

• Plan for both best and worst-case scenarios

Looking to Balance Homeownership with balanced finances?

My clients love the tools I share with help them understand the real cost of homeownership—without wrecking their financial goals. If you're a first-time buyer looking for a sweet spot between a comfortable home and a solid financial future, let's chat. Book a meeting to get started https://cal.com/jayantbahel/initial-discussion

Book recommendation : "The Psychology of Money" by Morgan Housel. (Spoiler: It won't tell you to max out your mortgage approval and hope for the best.) If you're going to read only 1 book this year, then read this one!