The young shouldn't be so restless
April 30, 2009
Comments on this story
(1)
Momoko Price
TORONTO STAR
Perhaps the only thing as reckless as rushing into marriage is rushing into your mortgage. But the jury's still out on which will cause you more heartache.
After more than 10 years in the business, Toronto-based mortgage broker Eduarda (Eddie) Pita has seen it all, including the hapless mortgagors who have stumbled into her office, broken, lost and in tears.
She recalls one woman whose income was shaky, having been unemployed for the last four years, while her husband was self-employed. She got approved for a $420,000 mortgage through a soft stated income plan and a line of credit that was used to pay the 5 per cent down payment. The house itself was worth no more than $440,000 at the time of purchase.
By the time Pita advised her, the woman was anchored to $60,000 in credit-card debt and a mortgage worth hundreds of thousands of dollars – not to mention a house whose market value was sinking with every passing day.
Pitiful as her situation was, Pita couldn't help but cast judgment.
"I said to her, `I can understand where you're coming from in that you're blaming this on the broker,'" Pita remembers. "`And I can understand that you wanted to buy this house and that's why the (real estate) agent got it for you.
"`But you knew what you were doing...You know your financing. Unfortunately your broker didn't do a step-by-step analysis to determine if this was a wise decision or not, but just using your common sense, how could you afford this?'"
Unfortunately, novice buyers often don't use common sense when scouting their first home, Pita says.
"They always want it now, now, now."
This woman in question certainly didn't buy her home as a sound financial investment. On the contrary, "She wanted to make her husband happy," remembers Pita.
Calum Ross, an independent mortgage consultant based in Toronto, stresses how badly buyers often underestimate the financial impact of a first mortgage.
"For an average consumer, taking out a mortgage is the largest financial decision they make in their life." And yet, he adds, consumers – who likely strategize endlessly over their $10,000 investment portfolio – will often draw a blank when it comes to the fine print of their $300,000 mortgage.
As home prices continue to plummet, the temptation to buy "now, now, now" has increased proportionally. Price tags and interest rates are at record lows. The situation seems win-win, especially for the cash-strapped younger set.
But Ross hopes members of this target market will think carefully about tying themselves down right now. "One of the things that concerns me more in this economy that hasn't really been there before, is that for the first time ever, we're seeing highly educated, professional types getting (severance packages), and that's much different than I've seen in the other economic downturns."
An important question you should be asking yourself is: Are you trying to land a mortgage now because you wouldn't be able to afford it otherwise? If so, you should be thinking twice about your eligibility for home ownership.
Adrian Sluga, 30, is a senior manager at commercial real estate firm Cadillac Fairview. With an MBA under his belt, his financial literacy is higher than most. Even so, he and his wife just rented out their Toronto condo to to help finance a new Scarborough home. They had to take a loss when the rent wasn't enough to cover the condo's monthly mortgage payment. Unfortunately, in this market even the most informed can still take a hit.
Lucky for him, the loss, about $250 a month, isn't anything he can't handle, but Sluga has seen his share of rookie mistakes among his homebuying peers.
"I think that a lot of people underestimate the carrying costs," he says. "Especially after closing, you don't really get hit with a lot of your costs until a month or so afterwards. Then you realize, oh right, property tax, and oh, insurance, and all this other stuff. People usually just think, `Oh (the price is) $180,000 or $250,000 and I can do that.' "
Toronto Star