October 12, 2017

Should You Go Over Budget on Your Home Purchase?

It’s no surprise that homes in major city centres like Toronto and Vancouver continue to be out of reach for many Canadians. With the average house price reaching $746,218 in Toronto and over $1 million in Vancouver in 2017, some buyers have been forced to stretch their budgets in order to purchase their dream home. In fact, according to a recent survey by TD, more than half of Canadians would be willing to exceed their budget by up to $50,000 to buy a home.

Exceeding your budget to purchase a home might seem like an effective way to tackle heating housing markets and win the bid, but it’s best to be cautious before making that wallet-stretching plea. In other words, going over your budget can come with a number of drawbacks that could lead to negative consequences down the road.

Lender issues

Once you put in an offer on a home and apply for a mortgage, an appraisal is often done by the lender to ensure that the buyer paid a fair value for the property. If the buyer has gone over budget and paid above fair market value, he or she runs the risk of having to come up with the difference. In doing so, the buyer might have to go through a secondary lender at a higher interest rate.

Related Read: Is 5% Down Enough in Toronto’s Hot Housing Market?

Closing costs

Stretching your budget could leave you with little room for additional costs including land transfer taxes, legal fees and moving expenses. These costs can add up to tens of thousands of dollars, and if you’ve gone $50,000 over budget, you’ve essentially run through the funds that should be allotted for closing costs. A potential consequence of this is having to once again borrow additional funds to cover these costs.

Unpredictable market swings

 Markets in cities like Toronto have been showing signs of cooling, and this means that valuations fluctuate from week to week. Stories have surfaced about potential buyers walking away from deposits due to sudden decreases in property values – meaning that they’ve put in offers that are sometimes significantly higher than the anticipated value at closing. When you stretch your budget, you’re more likely to run into this type of scenario. 

Neighbourhood comparables

When assessing the valuation of a home, one of the first things a good agent will do is look at similar homes in the same neighbourhood. If you look at homes in areas that are within your budget and bid well above the true value for those areas, you might end up paying more than what others have paid for similar homes. This means that you likely won’t see the same gains as your neighbours will for that Toronto townhouse or detached house because you’ve overpaid for your home.

Monthly affordability

Beyond the closing costs, paying above your budget and taking on additional mortgage debt means higher monthly payments, which might limit your monthly affordability. Before going above your budget to purchase a home you love, be sure to look into your monthly expenses and ensure you can meet those obligations.

The key to bidding on your dream home is to not let your emotions get in the way of putting in an offer you are comfortable with and can reasonably afford. The alternative can lead to unintended consequences that can plague you for a long time to come.