Buy a Smaller Home & Save

The whole idea of how much house we need to live comfortably has gone nuts. Years ago, when I was selling my house in the city to move to the country, I was amazed at who came to look. A downtown house that held two adults and up to four children, a nanny and an at-home business (approximately 2,200 sq ft) was being scanned by singles, newly marrieds and a couple of women with a baby. I kept thinking to myself, “why do they need all this house?” I would subsequently learn that that house was on the “small” side for the McMansion crowd.

Expectations might be changing. Led by our south-of-the-border cousins, we may be thinking 3,500, 4,000 and 5,000 sq. ft. homes are a little much. According to a survey by real estate search firm Trulia, 37% of Americans pegged their perfect home size at less than 2000 sq. ft.

People are finally waking up to the reality that a home is a place to live, not a sign of your success. If you want your home to be a safe place, not one filled with worry and scrambling to make ends meet, you’ll accept some truths.

Truth #1: Rising interest rates hurt more with a bigger, more expensive house. With gobs of people wondering how they’ll manage their whopper mortgages because of the spectre of rising interest rates, smaller is starting to look sweeter. We’re at the tail end of a generation-long cycle of declining interest rates, so people are thinking about how their increasing costs will squeeze their cash flows when they have to renew their mortgages at higher interest rates.

Truth #2: No down-payment mortgages are gone. They were stupid to begin with. They let people who had done no planning for home ownership into an arena many weren’t prepared for. They got eaten by the lions. If you can’t afford to save a downpayment, you likely can’t afford to be a homeowner.

Truth #3: Longer amortizations cost way more money. Choosing a 35-year amortization on a mortgage was the only way some people could afford the huge homes they were buying. The fact that they would end up paying almost three times the cost of the home after all was said and done seemed of little concern. With the shift to getting out of debt, which, please God, I hope is firmly taking hold, a 35 year mortgage is far less attractive to smart home buyers.

Truth #4: A home is a place to live, not a retirement savings account. The era of double-digit annual gains in home prices is gone. Tying up all your money in mortgage payments when you should be investing for retirement is far less attractive now. Buying smaller means more money for RRSPs, TFSA and unregistered investment portfolios.

Truth #5:  Smaller homes have lower carrying costs. It’s not just the mortgage. It’s the property taxes and insurance. It’s the utility bills and maintenance. And it’s all the stuff it takes to furnish a bigger home.  Spending less to keep your home all gussied up means more money for a life now, and a future.

Even as the prices of bigger homes come down to attract buyers, beware of falling into the trap of buying more house than you actually need. Yes, housing demand will go through the cycle and come out on a high again, but it could be a long wait. And if you have to sell your home in the meantime, you might find there are far fewer offers coming in because people are focused on less home being more money to spend elsewhere. Modest homes may be where the next big growth comes in the real estate market.

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Gail Vaz-Oxlade

Gail Vaz-Oxlade wants YOU! Join MyMoneyMyChoices.com to get smarter about your money and help others get smarter about theirs. Isn’t it time we eliminated financial illiteracy? Come find me on Google+ and on Twitter.

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33 Responses to “Buy a Smaller Home & Save”

  1. These are very important thins to remember as I’m often astounded how big of a house people buy sometimes and then come to find that they can barely afford the payments, let along pay a little extra to build up some equity in the house. Then there are those real nutbars who would make interest only payments treating their mortgage like rent with a whole lot of downside risk.

    We chose to start with a smaller semi-detached house that we are still living in and paid off in less than 5 years. We’re ready to upgrade to something bigger now that the family is growing but we’re waiting for the right set of circumstances to take the plunge. The current place is starting to feel small, but the longer we wait the easier it will be to afford a bigger place.

    Maybe interest rates will rise and prices will falls before its time to make that purchase – time will tell. Been waiting for interest rates to rise for a long time now…

  2. I don’t particularly want to clean a larger house either! I don’t like cleaning my 1200 square foot bungalow with 1 1/2 baths!
    With a finished basement, our house is closer to 2000 square feet of living space. It’s been enough and we have 2 daughters. There is a wish list however, and next year we hope to put on an addition with a garage and entranceway, the two areas lacking with our home. We also want to put on a fairly large extra living space after, as a multi function room. I’m slightly worried that those additions will turn our house into a McMansion, but it shouldn’t increase our costs too much, and it will all be paid in cash :)

  3. As a single who bought a modest home and paid it off in 5 years (sigh, plus 1 month…), I sort of wish I’d stretched a bit further.

    On the one hand, I’ve been strict about moving the previous mortgage money to savings (I don’t miss it, it gets transfered out like my mortgage used to). And, I’m not that great at home maintenance.

    But on the other hand, I’m sort of caught in the “do I make improvements or do I buy another house”… and I’m too lazy to do either.

  4. I totally agree! When we first started looking for a house we deliberately got a smaller home. We wanted to keep our upkeep costs down so that we could pay the house off sooner. Now that we have our first child we are growing into this home. Do I sometimes wish we had a bigger place? Yes. Is it frustrating watching people younger than me buying these big beautiful homes – of course. But I know we went into this with a plan and that when we do decide to upgrade (after a few more kids) that that home will be fully paid for. Knowing that with a little patience and discipline we’ll have our dream home and no mortgage, is worth the wait :-)

  5. We currently own (with a mortgage) a 2 bedroom condo, and for 2 of us, the 750sf is quite comfortable. But we miss things that a basement can provide, like space for a deep freezer. As we live in downtown TO, we only want a small home, even if we expand our family. But we can’t afford those. We can however, afford the McMansions outside the city in the suburbs. Personally I don’t want to clean that much house. But there isn’t a balance in what’s available for prices.

  6. I think this posting is based on the idea that a bigger house = more expensive than a smaller house. Yet as Heather notes above, that isn’t necessarily true in the bigger cities of Canada. My 1200 sq. ft house in Toronto cost the same as my brothers 3000 sq.ft house in Oshawa. For us it was never a choice of a bigger or a smaller house, it was a 30 minute commute or a 2 hour one. We chose the 30 and never looked back. Ironically though for all the perceptions about Toronto, our backyard is massive compared to my brother’s tiny suburban poststamp. Funny how that works.

  7. This article totally speaks to me!

    Last year my husband and I bought our first home. We could either buy a) a brand new, large home in the suburbs or b) a significantly smaller, older home in a central neighbourhood. We realized that if we were to buy a home further away from our workplaces (in the suburbs), we would have to buy a second vehicle, pay for extra down-town parking, extra vehicle maintenance, etc.. In the end, we realized that the 850-sq foot house was probably the best choice, and would allow me to take the bus to work, and to continue to live with a single vehicle.

    It’s so important to do the math first. While that larger, new home may be the best option for some couples, it certainly wasn’t for us, and I’m glad we did the research first before jumping into it.

  8. The article is posted twice.

  9. When we first started house hunting, I had my budget in mind and I didn’t want to go over it. About half-way through, we did increase our budget a little (to about half of what the bank pre-approved us for, but still manageable on one income just in case) because the houses we were looking at needed more than the increase in costs of work before they were inhabitable. Spending the low end of the budget would mean the fixer-upper both I and my fiancé just don’t have time for.

    We still bought smaller than others we know. But our house has everything that we wanted it to have. We didn’t want to move when we started a family and we wanted enough space to each have our own space without bugging the other person. He has the garage for his toys, we have a lovely backyard for entertaining and playing with our nieces and nephews, I have an awesome basement-gym and enough storage space to buy essentials when on discount. We have space together, space apart and it’s enough for when we have a family one day.

    We have seen so many of our friends move into a small house and then get the urge to sell two or three years after moving. We were able to save more for the down payment (our minimum was 20% with another 10% for essentials like furniture and the first shop and another 10% in the bank just in case) and don’t feel the need to move for a looooong time. We have everything we need in our area which is growing (property values have already gone up over $20K in one year), are close to our families and amenities and best of all, can grow into our comfortable house as needed. We did the math on closing costs and just couldn’t imagine selling two or three years after buying – those costs would eat any kind of profit!

    We didn’t buy a first house, we bought a forever house.

  10. Gail, you’ve expressed all of the thoughts that were going through my head yesterday as I toured several beautifully decorated showhomes in my corner of the world. With prices starting at $639,000 and going up, I could only shake my head at the idea of going back into the world of mortgages. After seeing these homes, which all cost a very pretty penny, I was ever so happy that my 1200sqft bungalow is paid off! Not having a mortgage means that I have so many options and that it’s super-easy to stay out of debt by paying cash for everything.

    Perhaps the option that I cherish the most is the option to retire early, and I’m one of the lucky ones who doesn’t hate her job. They have yet to build a house that would make me give up the option of early retirement!!!

  11. Oh my gosh, this article is so true. My BFF in US just told me that as the smallest house in a “nice” neighbourhood, the value of her house is actually recovering much faster than the McMansion size ones in the same neighbourhood as people are starting to wake up to carrying costs.

    I just bought what is now considered minisule – 1180 square feet with one bathroom! But I love the fact that it is so much less to clean. But you know, when this house was build circa 1890, it was a home that probably housed a family of 5 quite comfortably. My yard is bigger than most subdivisions and flat, usable! An I have beautiful old trees all aroud me. As well, another consideration for me was that I can walk places, not a slave to a car.

  12. I agree with Cas! Who wants to vacuum one of those McMansions?! Probably not the owners. …Then they hire a maid service, wasting even more money.

  13. I don’t think any of Gail’s points are important for one simple reason – real estate only goes up (my realtor and in laws told me so!), so buy as much house as you want 😉

  14. When I lived in Florida we built our house in 1986 for 96,000 it was 2500 sq ft on 1/2 acre of land. There was 4 of us living there and it was comfortable. It’s now 26 yrs later I’m now divorced, my kids are all grown and moved, I now live in Georgia and my house is 1500 sq ft. with almost 1 acre of land. When I moved I was looking for a smaller house I didn’t want anything bigger than 1500 sq ft. It’s a perfect size for me and my animals. Plus being smaller means smaller property taxes, smaller electric bills, etc.

  15. I find myself in a backwards scenario. Several years agoI bought a four floor townhome for $170,000. My children are both going to be gone in two years so I want to downsize. I am not going to need so much house. All the smaller bungalows or semi’s in my neighburhood start at $300,000. I am 50 years old and I am not taking on another mortgage

  16. Excellent points and very true.

    But, Gail has also written previously on the relative merits of buying one family home that lasts for generations, versus buying & selling as your family grows and needs change. My understanding is that there are risks/gains for each. It’s worth considering, though, not just the immediate needs. If you have to sell in a few years because your family is quickly outgrowing the house you bought, you may lose money. It doesn’t necessarily make sense to buy a smaller, cheaper house if there will be bigger expenses associated with re-selling too soon.

  17. My husband keeps thinking we need to move to have more space, I keep saying we just need to de-clutter! The house we live in is comparable to the one I grew up in and much bigger than the one he grew up in, so I know it’s totally possible to live in our home comfortably even with our son and possibly another kiddo in the future. I also love that there isn’t too much to clean (I’m not a good housekeeper), that the payments are manageable even with the crazy expense of daycare (more than our mortgage payment), and our neighbourhood has people with similar goals in life (to raise a happy healthy family, not work constantly etc.). If we moved to pricier digs, we’d be surrounded by more expensive “Joneses” to “keep up with” (not that I’d want to). I like my modest house, and more importantly, I loathe moving with a passion, I think we’ll stay put!

  18. The last house we were in (2000sqft inc. basment) we renovated and got so used to living on the top level of the split entry that when all the work was done we never used the basement. when we moved to our current home that is (2300sqft) all i do is clean. there are days that we talk about moving to a trailer when the kids are a little older and better to share a room. why spend the time cleaning and doing yard work when you could be off kayaking or hiking? not to mention the interest we would shave on reducing our mortage 230 000$… only problem is, we live far from any family and we would have nowhere to put them (we have someone visiting about 5 times or so a year who stay for a week at a time) that’s been our real struggle…

  19. When watching home buying shows, I’m constantly shocked how much people demand in their first home – double vanities in the bathroom, granite counter tops, a pool in the backyard, etc. All of which are just wants, not needs, but they go crazy and overpay for them. My husband and I wanted two bathrooms when looking for our home, but after seeing how much cheaper a house was with only one bathroom, we quickly changed our mind. I’d much rather share a bathroom and save money short term and long term!

  20. avatar Lovin' the West Coast Says:
    September 17, 2012 at 3:58 pm

    Gail, your message is so true!

    In the last year my husband was transferred and we downsized (considerably) to be able to afford a home in our new city. We went from a one acre lot to about one quarter that size. Our home is 1000 square feet smaller than our old 2600 square foot place. We also went from a two car garage to a one car garage.

    We have been pleasantly shocked at how much less time and money it takes to maintain our new house compared to our former home. Now we spend that time and money exploring our new city and are much happier and less stressed because of it!

  21. avatar Brendammmmmm Says:
    September 17, 2012 at 4:31 pm

    I do find the whole McMansion thing rather horrifying…expectations these young folks have. Where is it coming from? As a first time home buyer at 50…(a few years ago)…we bought a 600 sq ft bungalow…which WAS small. BUT…it was minutes to downtown T.O….a walkable neighbourhood with excellent transportation (NO GO TRAINS) and with just the 2 of us and a few animals..it was just fine. Needs and wants people…

  22. @psychsarah – yes! I keep saying we need to declutter too!

    Keeping up with the Joneses is a lot harder when you don’t have a lot of space. When I go to the store and think “I could really use this fancy new kitchen appliance that everyone else has,” I remind myself that I don’t have anywhere to put it. Living in a smaller house has actually reduced my “wants” spending simply because we don’t have room to store things!

    I have such an itty bitty little closet (our house was est. 1927), that I also think twice about buying clothes I don’t need. If there’s something in there I haven’t worn in a year, away it goes. I think twice about buying work blazers in those funky colours that will probably go out of style in a year.

    It seems like the bigger the house, and the bigger the closets, the more you want to fill that house and those closets…

  23. I agree with Melanie on the bigger the house the more you feel pressured to fill the spaces.

    Personally, I have lived in small spaces and now want more space. It’s only hubby and I, so we don’t need 8 bedrooms, but a 4 or 5 bedroom home would be fine. After we have a couple kids they’ll have their space. Plus we both need some office space and a spare bedroom for when family and friends come over.

    It’s all about affordability! If you want it, can afford it, go for it!

  24. I went from a 2 bedroom 1 bath bungalow to a 4 bedroom 2 bath split entry with a huge garage. We are a family of 3 – we didn’t need the space, but I do appreciate it. The size of the house didn’t sell me it on it, but rather the location. We have an acre lots, a park next to us and our son’s school is on the other side of the park. When we moved from the city to the county, we got way more house for the money. This house would have cost me at least 80,000 more just outside the city. A lot had to do with the market at the time as well, we had a month to move. Homes that were less expensive, needed a lot of work.

    My taxes are comparable to the old house – the real difference here is the cost of commuting. I would love to move closer to work, but I could be moved to a location of my company that is closer to home. It’s a tough call to make.

    We took advantage of the extra space and rented a room out for a while, but it’s a lot nicer to not have someone else in our space.
    The funny thing is we barely use the 2nd bathroom. The livingroom on the main floor is “the museum” as hubbie likes to call it.

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  26. Timely topic Gail, especially with the news about the slowdown in the Canadian housing market. Those truths are very real and people are finally beginning to understand it’s better to buy something within your means. Considering future investment possibilities is another focus for many folks. I still have about $200K outstanding on my mortgage, but instead of trying to pay it down as quickly as I can, I’m thinking about buying another property with my cash savings, renting it out, and using that income to pay off my current mortgage so in the end I’ll have two properties instead of one. Not sure if that is the best way to go these days, but we’ll see 😉

  27. Perfect timing Gail. We are in the process of doing this very thing.

  28. Some people may be planning to have 4 children and want a “forever home” so they buy big. But for myself, I grew up in tiny homes (a 3 bedroom semi detached and a 3 bedroom bungalow) and I think when I buy a house for my family I will stay small too!!

    I never understood the concept of a guest bedroom. Why pay all that extra moola for a bedroom that is rarely used? Move 2 kids in together when guests come and give them a kids room! Or put an air mattress in the living room and give your guests the master.

    or even better- put them in a nice hotel :)

    I also think a lot people dont use the home office they “needed”. Unless you work from home all day, a laptop on a table will do you just fine!

  29. My parents lived in a two storey, plus finished basement, 4 bedroom home, formal living room/dining room, family room on main floor and basement. When my brother and I lived at home, the only rooms that were used were the family room on the main floor and the kitchen (other than our bedrooms). My parents moved into a double trailer in Florida for the winter, and a one bedroom with office condo for summer up here. My daughters and I are perfectly comfortable staying over in the condo. There is a pull out sofa, and a comfy sofa in the main room. They can also accomodate (rather snugly) 6 guests at a time in their trailer. So I find it amazing what people “think” they need to accomodate guests or their growing family.

    I used to have (before divorce) a McMansion. 4 bedrooms, 3 baths, HUGE rooms. Yes my parents could come for a week and have their own bed and bathroom. Now I have a house that could nearly have fit in my master bedroom suite. I just put one of the girls in with the other, and let my parents have their bed. It is perfectly fine. I used to have an extra bed in my unfinished basement, but this is just as easy.

    I thought about finishing my basement, but no one would use it anyway. Except me on my treadmill, and I don’t care about it not being finished.

    When I think that my father grew up in a 3 bedroom home that housed 10 people at a time….

  30. We primarily chose our home because of the location – it was one of only two homes for sale in the neighbourhood by my inlaws, in an area where houses rarely come up for sale. We wanted to be close to my inlaws so I could keep some animals on their farm. Well, if we knew four years later my inlaws were going to kick my animals off their farm, we would have broadened our house search and probably bought a house in different area. The house itself is a perfect size, roughly 1200 sq feet? only problem no closets b/c its a century house. It was a fixer upper too, but we are close to being done and it is amazing.
    Our other regret? We would have moved out into the country onto a farm if we were willing to spend more and stretch ourselves, and since it would be an income property, it would have eventually paid for itself. Now along with house prices, farm prices have sky rocketed in our area, and there is no way my husband and I would be able to afford to buy a farm, even if we were to win the lottery. lol.

  31. Just got my water bill… old house averaged 25$ while heating with water new bigger house… 50$ and on electric… the cost of a larger house shows up everywhere!

  32. I too have an old, small house. We just spent several thousand dollars rejigging the closets – not bigger, but better organized, easier to access stuff. It made a lot of difference. Yes, it was expensive, but it is still cheaper than moving.

    We are in the process of trying to figure out how to add another bedroom onto the second floor. That too will be expensive, but again, once you think of realtor fees, taxes and moving expenses, still cheaper in the long run. The only problem is, the house will still be small. When we do sell, it won’t get the same price as newer houses with the same number of bedrooms. We won’t recoup our money. Doesn’t matter to us, we don’t want to move, but it is a consideration.

  33. I used to live in a too-big flat. It felt like I was haunting the place. One room was half-furnished and one not at all, and I never could keep up with the cleaning.

    Every time I catch myself thinking how nice it would be to have a seperate guest room, office, dining room, library… I remind myself of that place and how uncomfortable it was.

    Also, when I look at houses, more rooms rarely make the house prettier or more interesting. It’s just more of the same.

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