Something I see constantly and almost nobody expects. A car payment does more damage to what you can borrow than the car costs.
The arithmetic
Lenders count your monthly obligations against your income. A 700 dollar car payment eats 700 dollars a month of borrowing room, and at current rates that translates to somewhere around 110,000 to 130,000 dollars less mortgage.
Read that again, because it is the whole point. A vehicle you financed for 45,000 can cost you well over 100,000 in buying power.
I am seeing payments of 800, 1,000, and past 1,200 a month now, on seven and eight year terms. Those are not unusual any more, and they are quietly deciding what house people can buy.
Why nobody warns you
The dealership is not thinking about your mortgage. The bank approving your car loan is looking at whether you can service the car loan. Nobody in that room is holding the whole picture, and the consequence does not show up until you sit down with someone like me two years later.
What to do if you are buying a home soon
Do not finance a vehicle in the 12 months before you buy a house. If the car can wait, let it wait.
If you already have the payment, look at what is left. A loan with under about ten payments remaining can sometimes be excluded, and paying out the tail is occasionally the cheapest way to buy 60,000 dollars of mortgage room.
Leases count too, and they count for the full payment. Ending a lease early rarely helps because the buyout usually turns into a new loan.
If you already own the home
This is where it becomes an opportunity rather than a problem. Vehicle loans commonly sit between 7 and 11 percent, and higher on used. Rolling one into a mortgage at a fraction of that can cut the payment substantially.
The catch is real and worth naming. You would be stretching a five year debt across a much longer amortization, and paying for a car long after it is gone. It works when you use the freed-up cash flow deliberately, and it fails when the saving just disappears into the month.
The uncomfortable question
Sometimes the honest answer is that the vehicle is too expensive for the life you want. That is not a fun conversation and I have it fairly often. If the payment is the reason you cannot move house, cannot consolidate, and cannot get ahead, the vehicle is the thing to change.
If a car payment is squeezing your month, would it help to see what it is actually costing you?
General education, not financial advice. Figures are illustrative and subject to lender approval (O.A.C.). Lora Fenn, Mortgage Agent Level 1, Lic. #M25003153. Dominion Lending Centres YBM Group, FSRA #11129. 705-881-2780 · lfenn@dominionlending.ca
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