Should I Buy a House before I Buy a Car?
When making a significant purchase, such as a new car or a new house in Canada, it's important to consider your long-term financial goals. While it may be tempting to buy a new car first, there are several reasons why you should consider buying a new house before a new car, including the following:
Check out this REAL LIFE example:
Jack and Jill make a combined household income of $100,000 per year. They have saved about 5% down payment for their home purchase, approximately $20,000.
Without any other debts (no car payment), Jack and Jill qualify to purchase a home for approximately $410,000.
With a $1,000/month car payment, Jack and Jill qualify to purchase a home for approximately $340,000. They have reduced their affordability by $70,000. In Calgary, it is difficult to purchase a single-family home at $340,000, so they’ve also put themselves in a position where they may need to manage monthly condo fees. Managing a $300/month condo fee also reduces their ability to borrow funds by about $30,000, which brings the target purchase price down to $310,000.
The purchase of ONE vehicle, with a payment of $1000/month, has changed Jack and Jill's affordability by $100,000 and put them in a position where they are likely looking at a new community and property type.
Qualifying for a mortgage can be more challenging after buying a car: If you choose to buy a car before a house, the number one factor to consider is that it may be more difficult to qualify for a mortgage in the future. Car loans can impact your debt-to-income ratio, which is one of the factors lenders consider when determining your eligibility for a mortgage. A high debt-to-income ratio may result in less favourable mortgage terms, it may lower the purchase price you’re eligible for or disqualify you from a mortgage altogether.
Houses appreciate in value, while cars depreciate: Houses are typically an investment that appreciates in value over time. On the other hand, cars depreciate in value as soon as you drive them off the lot. By investing in a house, you can start to build equity and make a long-term investment that helps you to build your net worth in the future.
A house provides a stable and secure living environment: Owning a house provides a stable and secure living environment for you and your family. It means you have a place to call your own and won't have to worry about the uncertainty of renting or moving frequently. Each time you move, you incur costs. Owning a home and living there long term helps eliminate unnecessary fees for services such a moving companies, cleaning companies and repair companies that may need to fix the wear and tear at the rental property that you’re vacating so that you get your security deposit back from your landlord. Purchasing a car first can mean that you’re staying in the “rental cycle” for additional time and incurring unnecessary cost.
Buying a house can help you build equity: Investing in a house can help you build equity over time, which is the difference between the value of your home and the amount of your mortgage. With every mortgage payment you make, a portion of the payment goes toward building equity in your home (and the other portion goes towards paying interest). Building equity can provide additional financial flexibility, such as the option to take out a home equity loan or line of credit in the future.
A house is a long-term investment: Buying a house is a long-term investment that can provide financial stability and security for years to come. On the other hand, investing in a car is a short-term investment that typically needs to be replaced every few years. Choosing a home purchase as your initial primary focus is investing in your future and your long-term financial stability.
In conclusion, buying a house before a car is the wisest financial decision in Canada. Not only does this increase your purchasing power to buy the house and make qualifying for a mortgage easier, houses appreciate in value, provide a stable and secure living environment, and can help you build equity over time. Investing in a house is a long-term investment that can provide financial stability and security for years to come. Consider your long-term financial goals and choose an investment that aligns with them.
