Owning property is typically advisable, fellas, but there are times when it pays to rent, and multiple factors to consider before buying. You need to consider all them before making your decision.
The Booby will eventually help you identify some of the factors to consider, and hopefully help you to prioritize them. But first, let’s consider the decision on whether to buy at all:
Does Your Income Allow It?
This may seem obvious, but as we saw during the US financial crisis of 2008 neither homebuyers nor banks are the best judges of whether one’s financial position makes him a good candidate to own a home.
There is an old adage that your debts (including mortgage) should not exceed 40% of your gross monthly income. This is probably fair, but the Booby would encourage you to make that number even lower, if possible: 35% is great; 30% is even greater. That may seem impossible given your current wage, if so 40% will do. But it may also be possible that you need to reconsider how much home you really need, how nice a home you really need, and whether you can really afford to live in the kinds of neighbourhoods you desire.
If you’re already running car loans, credit card loans, and/or student loans it may be impossible to add a mortgage to the pile and still stay at or below 40%. If so, you need to get out of debt and save before buying.
Can You Pay A Mortgage and Still Accumulate Some Savings?
This is a matter of self-awareness and humility. Too many of our peers will devote their entire monthly incomes to buying as much home as possible, with as many luxuries as possible, in as nice a neighbourhood as possible. This typically means sinking far more than that 40% of your monthly income into your mortgage, especially when you include excessive furnishings and renovations.
Doing this simply reflects a lack of self-awareness and a lack of humility. You are in essence living beyond your means. Sure you’re keeping up with the bills (barely) every month, but you have no emergency savings, no capital to invest for retirement, and are powerless to change your situation.
If you cannot pay your monthly mortgage and still set aside at least a few hundred dollars for savings/investment then you are not only risking your solvency should life throw you a curve-ball, but you are also accustomizing yourself to a standard of living that you have no claim to. A lack of humility and self-awareness will likely catch up to you eventually. Here’s how.
Does Your Current Job Define Your Financial Power?
This is something the bank typically won’t discuss with you. Having a good, steady income isn’t necessarily enough. The economy changes almost daily. Companies downsize, technologies make human workers obsolete, and economies can go into recession.
Now this is of critical importance: How likely are you to find an alternative income that pays as well as your current position?
Are you a tradesman with skills in high demand? If so, losing a job may be only a temporary blip. Having skills in high-demand gives you bargaining power and increases your options. A job loss for you won’t necessarily be a back-breaker. That said, during severe recessions even high-skilled tradesman can see the job market turn unfriendly in short order.
Are you a lower-skilled worker? This doesn’t necessarily mean low-wage. Some lower-skilled workers find above average-paying employment with businesses like mills or in sales. If you have found such employment that’s great, but consider the probability of finding a similar-paying job should you lose the current one. Your barely affordable mortgage suddenly becomes unaffordable if you need to change careers.
Are you a highly specialized skilled worker? This could run the gamut of positions from underwater welders to nuclear engineers and everything in between. Now you will undoubtedly make terrific money, as you should, given the nature of your work. What you need to be aware of, however, is that in the event of a job loss, finding new employment can take a long time. There are simply more positions available for line cooks at any given moment than for underwater welders. Also, you may have to relocate to find that new position. That 30-year mortgage you just signed-up for has suddenly become an additional burden – though not a backbreaker by any means – as you hunt for a job.
Finally, there is the danger that you don’t lose your job! You may realize someday you hate your job. Its slowly killing you physically, mentally, or both. If you know full well you can’t replicate your current income elsewhere in the job market, and if you need every penny it pays to maintain your mortgage and lifestyle, then you have just indentured yourself to that job. Didn’t think that through, did you?
Are You In A Marriage, Common-Law, or Have Kids?
So far, the bad case scenarios have not addressed how your situation is affected by sharing a mortgage with a wife or common law spouse, let alone if there are children involved. Your situation may have just gone from bad to worse, depending on the decisions you made previous to buying.
All the considerations the Booby has advised you of can still potentially exist if you’re married, or married with children, except that now you have dependents.
If both your incomes are required to (barely) pay the bills every month then the loss of your income can be just as catastrophic as if you’re single. Your wife may well be supportive during this time, or she may resent you. You won’t know how she will react until she reacts. The bliss of falling in love faded years ago. Now factor in the potential burden of a collapsing marriage to your financial woes.
If there are children involved your risks just got greater. The stress of not being able to adequately provide can be a killer emotionally. Unfortunately, if you’ve indentured yourself to a standard of living you can’t afford, “adequately” has less to do with essentials, like food and shelter, and more to do with keeping up the appearances of a life you have no claim to.
Finally, your marriage may end in divorce. If you and your betrothed have children she is almost statistically certain to win custody. This means she will likely also be awarded the house… and the mortgage payments, which will factor into your monthly support payments. While it is fair that whoever has custody of the children should get the house, it is simply a fact that the odds are legally stacked against your ever winning custody. The house may be “half yours” in theory, but it could possibly be a house you will never live in again after the divorce, although you will still be financially beholden to it.
Do It Right or Not at All
These are just a few of the factors to consider, factors that your banker may not discuss with you. The Booby doesn’t wish to discourage you from owning a home, but he does mean to give you pause before rushing into your decision.
Do it right. Whether you’re single or married with children, consider that 40% debt rule we discussed, and whether you can make it smaller. Consider whether you have money for savings at the end of each month. Consider whether you’re entering into a lifestyle that can only end in financial disaster. Consider whether you can depend on your income long-term, or if doing so will devour your soul. Lots of men before you have made terrible decisions that cost them later on.
You will never have more power, more options, or more freedom than you do before you sign for that mortgage. Going about it wisely will mean short-term pain for long-term gain; doing it wrong may well destroy your financial sovereignty.