The past year, and the preceding years haven’t been great for mortgages, with many first-time homebuyers forced to foreclose due to mortgage demands that got away from them. In many cases this was due to forces beyond the control of homeowners; illness, or job losses being the most obvious. But, in many cases, it was due to first-timers wading into the financial waters of homeowning without a solid foundation in understanding what the real costs are.
Guest posting today is mortgage consultant and home buying expert Andrew Legge who talks about some of the ways to approach the business of negotiating a mortgage that is sustainable for the long term, no matter where you’re looking to buy.
So you’ve been looking around your rented digs and looking at that rent cheque you write every month and perhaps you’re thinking “Hey … I’m paying my landlords mortgage!”. You are! At this point you might be thinking “Maybe I’ll buy my own place and pay down my own mortgage!”. Great, now where to start?
First thing to think about is “what can I afford?”
If that’s me making the decision, I want to think about how much I want to pay each month. If you’re renting, a good place to start is your rent. Is that what you’re comfortable with? Let’s assume that it is. Take that figure and now you’ve got to factor in some more things than just paying the rent/mortgage. There’s property tax, heat, and maintenance fees if it’s a strata you’ve got your eye on. Take those off your rent and you’ve got your mortgage payment.
Now that you’ve got that sorted, just how much mortgage will that get you? There are a great many calculators out there:
There are many to choose from, be it a mortgage brokerages, financial planners or your banks. When you get asked for your income, it’s your GROSS income that they’re looking for, not NET, unless otherwise specifed. When a mortgage professional asks what your income is we always mean gross. When they ask for debt payment amounts put what your comfortable putting, but you need only to put in the minimum required amounts. Debts are generally Credit Cards, Loans, and Lines of Credit. You’ll have to estimate Property Tax, Heat and Maintenance.
This will spit out what you can ‘afford’. Most of the time, it will give you a mortgage with a payment that is way higher than the amount you decided you were comfortable with. That’s because out of that gross income most lenders will give you a mortgage that, along with the tax and whatnot, eats up 44% of your gross income. 44%!! That’s before you pay income tax, clothe yourself and, you know, eat. Sounds crazy right? It kind of is. This is why it’s best for YOU to determine what you want to spend before getting qualified for what you can.
Also if you’re maxing yourself out in this environment, you’d best be preparing for a rise in rates and how you’re going to pay for that. If you don’t, then when your renewal comes around you’re going to take a punch in the face. At the very least a slap. With rates as low as they are, even if they are rising a little, little movements are a big deal. This is because the increases of 0.10% or 0.20% end up being such a large percentage in relation to the rate that you’ve got. Also in the early going of a mortgage the bulk of payment is interest. Those rises will make a BIG difference.
So if you’re starting to think that owning is a better idea than renting, first start off with a workable budget. Then make a plan for when rates rise, or put another way, when your rent is going to get jacked.
Please note that my expertise is in the Canadian mortgage market. For those reading from the United States here are a few resources that I’ve found that may be useful for you! A reputable mortgage broker is your best bet in my opinion.
If you have any questions always please feel free to get in touch with me!
In addition to his blog, and his site, you can follow Andrew Legge on Twitter for real time interaction and information about home lenders.