Because cars are such a necessity, people often buy them without much thought of the distant future. If you are thinking about upgrading your old car to a newer model, but you know what you will be purchasing a piece of property in the near future, the property comes first. Having a car loan that takes up too much of your monthly income (or that you can’t actually afford to make payments on) will negatively impact your chances of being approved for a mortgage.
An Example of How Buying a Car Affects Buying a House
Let’s take Gord for example. Gord is a first-time home buyer who earns a salary of $50,000 annually without any debt and is looking to purchase his first condo with 5% down payment saved. He is also interested in upgrading his old car into a newer model; however, he will have monthly payments of $500 per month on a car loan. If he continues to drive his old car that does not have any payments owing on it, he will be qualified for a maximum mortgage amount of $272,000. If however, he decides to purchase his new car before purchasing his condo, the maximum mortgage amount that he will qualify for will be greatly reduced to $187,000 (both these numbers are approximate).
Our advice would be if you or anyone you know is looking to purchase a home, but is also considering a new car, wait until the completion of your home purchase is done before purchasing the car (if you are financing or leasing). The monthly car obligation will greatly reduce how much you will qualify for; it is 100% worth the wait driving your old car that little bit longer. If needs be, purchase a cheap runaround using cash until the mortgage loan has been secured.
Thinking about and planning for the future when it comes to your finances is extremely important. Buying a car can affect your ability to buy a house but it doesn’t have to prevent you from getting the home of your dreams.