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How to avoid the financial misery that comes with too much mortgage
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Robert McLister: The stress caused by tight finances is not trivial – it can lead to your premature death
Published June 14, 2024 • Last updated 1 day ago • 4 minute read
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In many cases, by stretching their budget, people get mortgages that are heavier than their wallets can handle. Photo by Getty Images/iStockphoto
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When Lenders Evaluate You for a mortgagethey look at debt-to-income ratios, down payments, credit, and so on, and most people pass.
But not everyone is approved for the mortgage they he must to take.
In many cases, by stretching their budget, people get mortgages that are heavier than their wallets can handle. Onerous mortgages not only make them housing poor, but to look for shows that the stress they cause can shave years off a borrower’s life.
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So if you’re not interested in your mortgage sending you to your premature death, consider these tips for downsizing it.
But first, some statistics
One-third (33 percent) of mortgage holders researched by Mortgage Professionals Canada (MPC) They say they regret taking on the size of the mortgage they took out. On a percentage basis, this represents 27% more than 12 months earlier. And, for those who renew next year, the proportion of regrets is 10 percentage points higher.
This makes us wonder why people voluntarily plunge into this mortgage misery.
One factor is unnecessarily exorbitant home prices. Many feel they have no choice but to pay. This reality is driven mainly by excessive population growth and the lack of housing construction. Credit for the population boom goes to the federal government, while the lack of construction can be blamed on all levels of government.
The second reason is buyer expectations. People have blind faith that prices will continue to rise. In fact, 72 per cent of Canadians think prices will rise in the next 12 months, the MPC survey finds. And the majority (58 percent) say that their purchase was, at least partially, motivated by the expectation of home appreciation.
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Plus, with rents at all-time highs, many buyers feel they must buy.
However, with a slowing economy, more housing construction, pressure on politicians to control immigration, a near-record unaffordable price level and a virtually more acute situation house price adjusted for inflation increase on Earth, it would be foolish to expect the same long-term annual appreciation rate of 5.7% that Canada has experienced since 1981.
Canadians will likely still earn above-inflation tax-free income from their primary residence over the long term, but more than ever, it makes sense to diversify wealth into other investments.
Correctly sizing your mortgage risk
You can’t trust lenders to tell you that your mortgage is too heavy.
And stretching your home buying budget to the max, as CMHC says nearly half of buyers do, is a fast track to the grim reaper stress we were talking about.
In short, the more you push the limits of your home buying budget, the more you risk:
- Having little or no discretionary income for boring things like going out to eat, vacations, Christmas and birthday gifts, hobbies, home maintenance, retirement investments, and emergencies
- Negative equity, where your home is worth less than your mortgage – a legitimate risk for those paying just five percent
- Difficulty selling for a significant profit, or even what you paid for, if you need to offload during a market downturn.
- Significant increases in payments at renewal or on a floating rate mortgage if rates rise again.
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This last point is not a trivial conversation. Despite the likelihood of falling rates next year, economists around the world, and the Bank of Canada, warn that interest rates could be higher than in the past due to structural inflation challenges.
An interesting tidbit: The MPC says variable rate holders are almost six times more likely than those with fixed rate mortgages to regret becoming homeowners. Although these numbers will normalize as rates fall.
Two tactics
To avoid these financial migraines, buyers should adopt two simple strategies, among others:
First, keep at least a five percent reserve in your budget after all living expenses, including housing. That’s just the bare minimum, because a $5,000 safety net on a $100,000 salary can disappear with a single unexpected bill, or worse – a layoff, separation, or illness.
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Second, maintain adequate liquidity after purchasing a home. Old wisdom said to save three months of living expenses, but with real estate and inflation uncertainty looming, increase that amount to six months.
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And if you have a long road to retirement, are risk tolerant, prudent with your money, and have no future cash needs, consider putting your reserve funds into slightly higher yielding assets that you can turn into cash in the short term. term. Then consider a line of credit as collateral for those savings. This way, you can slightly increase your investment risk to achieve higher returns and have a secondary source of liquidity in case your investments temporarily decline, just when you need them. And avoid using this backup line of credit for anything that doesn’t make or save you money.
In essence, plan for the worst, hope for the best, and don’t let your lender set your lending standard.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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