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What is your mortgage risk? With such low interest rates these days, people may be buying into being house poor in the long term. Don’t risk being caught short.
Mortgage Risk
(Mortgage calculations tested using TD Bank online calculator)
Shopping for a home and mortgage is almost like playing the stock market only it’s an inverse relationship. In an ideal world, you win when rates go down and lose when they go up. Know your risk tolerance. Don’t buy so much house that when the mortgage rates increase, you are in a position of having to sell because you can’t afford the new payments. This gives the buyer an advantage and any gains could be gone out the window.
First Five Years
Let’s say you find a house for $400,000. You have $100,000 to put down (the more, the better). You manage to get a $300,000 mortgage at 2.5%. That’s possible in Canada these days. Your payment would be $608.17 bi-weekly on a 5 year term, 25 year amortization. Your debt service ration needs to stay under 40% of your income. That means all debt combined must be less than 40% of your income. In order to qualify for a $300,000 mortgage, you would need an income in the neighbourhood of $4,000 per month by the time you consider property taxes and assuming you have virtually no other debt. At the end of 5 years, you owe approximately $254,000.
(Should you insure your mortgage?)
Second Five Years
Now, consider the possibility that mortgage rates could double to 5%. You don’t think that could happen? I was paying 12% in the early 90’s. So, the rate goes to 5% and the payment is increased to $679.08. You were at your debt service limit last time and now the payment is going up a little over $140 per month. Have you had a raise that will cover that? What if you need $20,000 for renovations or things like furnace and roof? Now the payment is $732.55. You could be under water.
(Is your mortgage tax deductible?)
How much house can you afford?
We all want a safe and happy home. Those with children want give their kids the best. How do you define that? There are so many factors to consider when deciding how much you can afford to spend on a house.
Five Home Ownership Gotcha’s:
Leaky roofs.- Furnace failures.
- Appliance break downs. (They seem to go at once!)
- Tax increases.
- Mortgage rate increases.
Five General Life Gotcha’s:
- Car maintenance, replacement.
- Moving expenses.
- Ongoing education debt and expenses.
- Emergency medical expenses. (Longer term time off work?)
- Vacation (You’ll burn out if you don’t!)
The decision on how much to spend on a home depends on more than your current debt service ratio. I would recommend getting together with your financial advisor and take this blog with you as a prompt to get the discussion started. Your advisor will likely have a lot more to consider and is in the best position to advise you on when and how much house fits into your budget.
The heart is very powerful and can take you down the wrong path if you let it. Consider that any house you buy may be a step to the one you want. When we try to move to fast, accidents happen. Don’t let your dreams for the perfect home cause you to leave the road and become a financial wreck.
See your financial advisor the next time you are looking for a mortgage and do a financial review. Keep in mind that banks and mortgage lenders are in the business of selling you debt vehicles. Financial advisors make their money when you keep yours. Know your limits and know your risk tolerance.
(Do you have a #LegalSavingsPlan?)
Make it a great day,
Barry
P.S. What am I thankful for today? I’m thankful for my time at Investors Group. I’m thankful for access to great advisors. I’m thankful for opportunities to learn.
What are you thankful for today?
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