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Think small for big purchases

By Rob Carrick

The Globe and Mail: Published Monday, Jul. 15 2013

We have a big problem.

Big weddings, big cars, big houses. They add up to big debts. Next time you’re considering a major purchase, try thinking small.

The Think Small philosophy of spending may be the only way some first-time buyers will ever get into today’s housing market, where borrowing costs have risen and prices are holding firm or rising on a national basis.

Further mortgage rate increases might help keep a lid on sales and prices, but they’re deadly in terms of overall housing affordability. The average Canadian home sold for $386,585 in June, which means monthly payments of $1,865 if you assume a 3.39 per cent fixed five-year mortgage rate and a 5 per cent down payment. If prices fell 5 per cent and mortgage rates increased by half a percentage point, the monthly payment is pretty much the same. The lesson here is that small rate hikes offset sizable price declines.

Some options for circumventing high house prices: Rent, buy a condo instead of a house, live in the suburbs or countryside, or buy a house and rent out a bedroom or basement apartment. Another approach is to think small. Buy a house with three bedrooms instead of four. Forgo the main floor family room and big backyard, or go for a bungalow instead of a two-storey home.

Inspiration for considering the Think Small philosophy of spending can be found in a short personal essay written by a Globe reader named Liz Mayer. For almost 30 years, she and her husband owned a 3,000-square-foot Victorian home in Belleville, Ont. They thought big as buyers, and now they regret it.

In particular, they regret a two-storey addition to what was already a large house. “We didn’t need more space,” Ms. Mayer writes. “We could have managed just fine with less room and had more money left over, both to build wealth, and do more of the things we enjoyed – travelling, going out with friends and family and contributing to causes we believed in.”

Numbers from the real estate broker Royal LePage show the national average price for a two-storey house was $419,614 in the second quarter, while the bungalow average was $386,547 and the average price for a condo was $248.750. Buying a smaller home means big compromises, but you save a lot of money. At current discounted five-year mortgage rates, the monthly difference between the average two-storey home and condo is $823, assuming a 5 per cent down payment. You’ll also pay less in utilities, insurance and maintenance with a smaller home.

My comment: Lots of good advice here, especially for first time buyers. But it’s important to consider condo fees when calculating potential savings.  – Robert.

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