I’ve made a lot of money mistakes over the years. One of my biggest regrets was getting in over my head as a first time home buyer.
It was 2003 and, although the real estate market had been stagnant for years, the Alberta housing boom was about to begin.
Getting in over my head
The house I had lived in for the previous five years – co-signed with my parents when I was a University student – had just been sold and, after paying off a good chunk of my student loans, I was left with about $18,000 for a down payment on a new place.
My girlfriend (now wife) and I went house hunting and found the perfect starter home. It was a brand new, 2-bedroom, 1-bathroom, 4-level split house that was a month from completion.
It came with a huge backyard, and the 3rd level gave us some extra living space that we hadn’t found in the other homes in our price range.
The market was starting to pick up; the builder incentives to include all the kitchen appliances, window coverings, and a tree for the front yard was pulled off the table a few weeks before we closed.
Related: 4 Advantages Of Building A House
I decided to buy the place and agreed to the asking price of $129,900. That was only $100 less than what I was pre-approved for by the bank – talk about stretching to the limit.
In fact I was stretched much further because, at the time, I was only making $32,000 as a hotel sales manager in my first year out of school.
My girlfriend would move in and we decided to get another roommate to help pay the bills.
I only put 10% down, which meant I had to pay CMHC fees. That added another $2,500 to the mortgage.
New appliances, window coverings and landscaping ate up the rest of my savings. I was tapped-out by the time we moved in.
Related: How Much House Can I Afford?
Negative Cash Flow
Having a roommate to kick-in $400 a month would help to hide the fact that I spent more than I earned.
When he left eight months later to go work on the family farm, I went from living paycheque-to-paycheque to being $400 a month short.
Instead of getting another roommate I decided that things would be fine. They weren’t.
I resorted to using credit cards to cover my cash flow shortage; taking out cash advances and running two cards right up to the limit.
In less than a year I had racked up $8,000 in credit card debt. Things were getting so bad that at one point I had skipped a credit card payment and then borrowed money from my boss to make it through the month.
To make matters worse, I thought I had reached a dead-end in my career. My direct supervisor (not the one I borrowed from) was incompetent and I felt she was holding me back from advancing my career.
Related: How A Career Change Improved My Life
Saved By A Lucky Break
At my lowest point, I broke down to my girlfriend and explained what was going on. We’d have to make some tough decisions to cut back on our spending or we’d have to sell the house.
It took a few months but we got back on track. We started a budget and cut back what we spent on groceries and dining out.
We managed to get our cash flow back to positive territory, but we were still living on the edge financially.
Then I caught a lucky break when my supervisor was let go and I was elevated to director of sales. The promotion came with a $10,000 raise, which gave us a ton of breathing room.
Now I could afford to pay more than just the minimum monthly payment on my credit cards. Still, at 19% interest, it was costing a small fortune to carry a high balance from month-to-month.
Related: 35 Ways To Save Money
I went to the bank and asked about a home equity line of credit. The house was worth $190,000 now and had $80,000 in equity.
I took out a $25,000 line of credit and used it to pay off my credit cards as well as the remainder of my student loans.
Final thoughts on home buying
While the federal government took steps to reign-in the hot housing market last summer, the banks will do anything to keep the party going.
A mortgage rate war has already begun as we head into the key Spring selling season.
First time home buyers should be cautious not to get lured in by ultra-low interest rates.
Housing prices a decade ago pale in comparison to today’s over-inflated real estate market. But the lessons learned from my home buying experience remain the same.
My biggest home buying regrets were:
- Borrowing the maximum I was approved for by the bank
- Depleting my savings on closing costs and furnishings
- Not doing a proper monthly budget
- Underestimating how much I’d rely on renting out a room for income
- Overestimating my own income and opportunity for promotion
I was extremely fortunate to get a promotion and have my home rise in value at the right time when I needed help.
Related: Our Fast Track To Financial Freedom
But with wages flat and real estate prices falling, I’m afraid it won’t end as well for home buyers who get in over their heads this time.
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