Why we bought one third the house we could “afford”

“You have been pre-approved for a massive mortgage – go forth and purchase a $900,000 home!”

While that is slightly paraphrased, we were in fact approved for a massive mortgage. And we seriously considered a couple homes in the $800k range that would have had us close to maxing out the loan.

We went a different direction.

We bought a townhouse for $344,000 which happened to be on the bottom end of the cost range for the 26 houses we checked out. We weren’t out to buy the cheapest place we could find, but when we considered all the pros and cons it bubbled to the top of the list in no time. Here are some of the key advantages:

  • We are a 5 minute walk from my wife’s work. Avoiding long and stressful commutes is a huge contributor to her quality of life, and means more time at home to do whatever she wants. And her being less stressed and exhausted means the whole family is better off. It is hard to put a value on quality of life.
  • With my wife so close to work we don’t need a second car, which has significant financial benefits. Based on some estimates I ran in the CAA online calculator my guess is that we save at least $6000/year. It is likely much more.
  • We live on a quiet street and back on to a ravine with a trail, so instead of neighbours behind us we have trees, water, birds, rabbits, and pair of coyotes (I didn’t believe it until my wife and son saw them). We use the trail almost daily, which is again a big contributor to quality of life.
  • While we feel the space is sufficient for our needs, the house is much smaller in terms of square footage than we could have “afforded”. This means there is less to clean and maintain.
  • It also means utilities are less expensive as there is less space to heat/cool.
  • Given that property taxes are calculated as a percentage of appraised value (about 1%), buying about 1/3rd of the house we could have means that the fixed cost of municipal taxes end up being much lower. So for instance, we pay about $3,400 a year rather than the $7,000 ish we would have paid if we bought a house on the higher end of what were were approved for.
  • But the biggest advantage is the savings in monthly mortgages payments. Our current monthly mortgage payment is less than $1200. If we would have purchased a house for an additional $500,000 we would be paying more than $3300 a month (assuming the same interest rate).

What becomes clear from reviewing the list above is that beyond the quality of life factors I mentioned, there are some very tangible financial benefits to purchasing the house we did:

  • 1 less car in the driveway saves us $500/month.
  • A less expensive house saves us more than $300/month in property taxes.
  • A smaller house means we save on utilities, perhaps $100 a month (we average about $225/month).
  • A mortgage of $1180 a month instead of $3300 translates to an extra $2100/month.

Putting all of the above together: by not buying a house for $844,000 that the banks told us we could “afford” and going instead with the townhouse we bought for $344,000, we have an extra $3000 in the bank each month. Here are some real life examples of what we are doing with that extra cash:

  • $208 – contributing to our son’s RESP
  • $500 – making an extra contribution to my RRSP
  • $916 – maxing out our TFSAs ($458 each)
  • $1200 – making charitable donations to help vulnerable families around the world

Yep, all of that and more (there is still $175 to spare) is possible because of one simple decision: we didn’t buy the house that the bank and the real estate agent said we should. And with each month that passes – with an additional $3,000 to work with as we make decisions on how to spend our money – I feel even more strongly that it was the right decision. It’s true, we don’t live in hippest neighbourhood with the best coffee shops and restaurants. But we have an excellent quality of life, and we are not stressed out worrying about how we will make ends meet: we have what we need and more, we are able to save and invest for the future, and we can even share a bit with those who haven’t had the same opportunities in life.

It’s amazing to see the impact that one simple decision can have on our lives.

Do you have any examples of simple decisions that have made a big impact on your finances?

2 thoughts on “Why we bought one third the house we could “afford””

  1. Wow! This is a really helpful article. My wife and I are further along in our finances (and age) but this is great advice for couples who are younger and tempted to get in over their heads with debt, especially with the current house pricing phenomenon.

    1. Thanks, Todd. Glad you appreciated the article. You’re right about the temptation (and often encouragement) for younger folks to get into massive amounts of debt. I was sitting on my deck the other day, for instance, when I overheard a mom and daughter as they walked on the path behind out house. The daughter said something about how much she liked the townhouses they were walking by (we live in one of them but there are about a dozen units along the stretch they were walking). The mom’s response was interesting: “yes, I guess…for a starter home perhaps”.

      I can’t remember the exact number, but I heard post war homes were often 800 square feet. And the typical home definitely had more kids running around in those days, so square feet per person would have been tiny relative to what we are used to. We have 1600 square feet, a garage, a deck, and we back on to a trail and nature area. We don’t even use all of the space in our home. But for some reason this mom feels the need to discourage her daughter from being satisfied with the townhouse. It’s amazing how much our expectations have changed in a couple generations. And it is also amazing how potentially significant the implications of this mom’s discouragement are for the daughter, as the dream home she has in mind may cost twice as much. And as you can see from the post above, that will have a significant impact on debt levels and in turn monthly cash flow.

      Anyway, thanks for stopping by. Appreciate the comment.

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