Buy a Smaller Home & Save
Posted by Gail | Filed under Home Buying
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.