Wednesday, September 12, 2007

Mortgages are great once you have considered all your options - carefully!

Mortgages are great once you have considered all your options - carefully!

From Thursday's Globe and Mail ROB CARRICK September 6, 2007 at 6:36 AM EDT

Home ownership is a wonderful thing and all, but sometimes it makes sense just to rent.

This is the logical conclusion to be drawn from some tips offered yesterday by the mortgage brokerage firm Invis to help people understand the current interest rate environment and upheaval in the U.S. housing market.

"The key to a successful mortgage experience is carefully considering all your options and buying within your means so that you can sustain your payments," Invis president and CEO Neil Glasberg said in a press release.

It's good advice. If you follow it, you may not end up buying a house right now.

Invis starts off by recommending that people find out what they can afford by getting preapproved for a mortgage by a lender. One benefit of doing this is that you can lock in a mortgage rate for as long as 120 days. Another is that you'll quickly get an idea of whether you'll comfortably be able to afford a home or whether you'll be asking for trouble.

We're not talking about falling into the same difficulties as those poor U.S. home buyers who are defaulting on mortgages that enabled them to get in over their heads. The U.S. subprime mortgage market, catering to people with weak credit ratings and a strong desire to buy a home, is a striking example of how a predatory financial industry eats up gullible people and spits out the bones.

The risk of taking on a mortgage here in Canada is not so much that you'll default, but rather that you'll be so house-poor it hurts.

Invis suggests revisiting your current debts to make a house more affordable, which makes sense in theory because it looks like interest rate declines are going to help on this front. The Bank of Canada left its trendsetting overnight rate unchanged yesterday and said the domestic economy remains strong, even if there are risks posed by the trickle-down effects of the U.S. mortgage situation.

One way to restructure your current debts would be to increase the amortization on a car loan, thereby lowering the monthly payments. This would have the effect of lowering your total debt services ratio, which lenders follow closely because it shows how much of your pretax income is consumed by all your debts, including your mortgage.

Barring financial distress, there are only two good reasons to restructure a loan of any kind: To get the debt paid off sooner, or to take advantage of falling interest rates. Don't renegotiate your debts just so you can borrow more. If this is the only way for you to afford a home, one interpretation would be that you can't actually afford that home.

Lenders generally don't want to see your total debt service ratio go above 40 per cent, which means $40 of every $100 you earned would go to loans, credit cards and your mortgage. If you think this is a financial plan you can live with, stop a moment to consider whether money would be so tight that you end up piling on more debt over the years to maintain your lifestyle.

Invis acknowledges the potential stresses of carrying a big mortgage by suggesting you look into a longer amortization period than the traditional 25-year period. You can go as long as 30, 35 or 40 years, and in doing so you will buy yourself some financial stock on a day-to-day basis. The downside is that you'll pay thousands more in interest, and require an extra five to 20 years to get your mortgage paid off.

If you're 30 years old, you could conceivably be committing yourself to a mortgage you won't be rid of until you retire. Round about the time most people are ramping up their retirement savings, you'll still be paying big chunks of money to your mortgage lender.

Invis suggests increasing the size of your down payment as a way of reducing the amount you need to borrow. The obvious threshold to shoot for is 20 per cent, which would allow you to save on mortgage insurance. But with the average house price in Canada now above $310,000, you'll need at least $62,000 to qualify.

Invis points out that the federal Home Buyers' Plan may help because it allows you to withdraw up to $20,000 from a registered retirement savings plan to buy a home. If you're young and have time to backfill your RRSP, that's not a bad option.

A lot of what's gone on in the mortgage market in recent years has been about helping people buy homes in a market where prices have soared. The underlying assumption is that there's always a way to make homes attainable, when in fact this just isn't true.

If you find that discouraging, just look to the U.S. housing market. Sales there are falling, and you know what that does to prices and affordability.

Read more about Mortgage Interest Rates

Search the MLS or read more about Interest Rates, Power of Sale Properties, Price Trends and more at my website. Homes for Sale

Thank you for reading my blog and if there is anything else I can help you with please don't hesitate to contact me,

Mark

A. Mark Argentino
P. Eng. Broker
Specializing in Residential & Investment Real Estate


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