MY 2% TEST – CAN YOU AFFORD YOUR LIFE?

Trying to enter the real estate market?
Wondering if you can afford it?

Person 1: “Whoa! This online calculator said we can afford a $600,000 mortgage!”
Person 2: “Sweet!! Let’s buy the house soon before housing prices go up”

Interest rates are at historic lows right now in Canada. This makes large mortgages very affordable…for now.

Here’s a test that I do with all of my clients when answering the question – Can we afford to buy a house?

MY 2% TEST

  1. Run the numbers using your current info. Can you afford the house? Can you afford to pay for repair and maintenance? Can you afford to still have a social life? Great.
  2. Now, if we raise the interest rates used in the calculations by 2%, could you still afford the house?

The answer is often shockingly NO.

Many Canadians are VERY leveraged.  According to McKinsey Global Institute, House poor adults aged 35 – 44 carry the heaviest debt loads.

The Debt:Income ratio is 155% – AKA, for every dollar we earn, we owe $1.55

WTF!!!!

These ridiculously low interest rates also make the cost of carrying other debt (like lines of credit and credit cards) cheaper. But, it’s false comfort.

So, ask yourself: If interest rates rose by 2%, could you still afford your life?

If the answer is no, then pay off as much debt as possible RIGHT NOW, and you may want to rethink buying that house.