With interest rates at record lows – for now, at least – it’s tempting to buy as much house as affordable as quickly as possible.
Experts say some families are buying prematurely, to cash in on low interest rates, while others are stretching their budgets to buy more expensive homes with hopes to magnify the appreciation they might cash in on.
“A lot of families are leapfrogging over that starter home,” says Vince Gaetano, an owner of brokerage MonsterMortgage.ca in Toronto.
Before buyers rush into either of these scenarios, though, they should consider the pitfalls. Here are ways to take advantage of low rates while guarding your financial security.
Stick to your goals, not your lender’s
“The lender does not tell you how much you can borrow,” says Ted Rechtshaffen, president and chief executive officer of the financial consulting firm TriDelta Financial in Toronto. “You tell yourself how much you can borrow.”
“People always want to know, ‘What’s the max I can afford?’” says Mr. Gaetano. “But the max may not be the best thing for them, considering their lifestyle.”
A detailed household budget will help determine what you can afford. “A lot of people assume they know what they spend, but it’s almost always more,” says Mr. Rechtshaffen, who recommends recording all costs in a spreadsheet.
Be mindful of how that budget can change, particularly for couples about to start a family, he says. “As the father of three relatively young kids, I can tell you the costs go up every year.”
Lender approval can also be problematic because qualifying criteria might have become out of date, says Mr. Gaetano. “It doesn’t take into account some costs, like mobile fees,” he says, “or the increasing cost of hydro and utilities.”
Don’t skimp on the down payment
If you can afford to put down only 5 per cent, you can’t afford the house, says Mr. Rechtshaffen. “There are too many unknowns out there, and with five per cent down, you’re making the riskiest investment you can make,” he says.
This is particularly true in steep real estate markets such as Toronto and Vancouver. “It’s a bigger issue in Vancouver, where prices have been more volatile, than in Toronto,” he says. “If you put five per cent down in Vancouver and the wind blows in the wrong direction for a year, you could have negative equity very quickly.”
Putting down at least 20 per cent will also save you the cost of Canada Mortgage and Housing Corporation mortgage insurance, he adds.
He also recommends against mortgage life insurance, urging people to choose a life insurance policy that in some way includes the mortgage. “While there is some benefit to the buyer, the biggest benefit is to the lender,” says Mr. Rechtshaffen. “There are much better deals out there on life insurance that are not directly tied to your mortgage.”
Plan on an interest rate hike
The best way to take advantage of low rates, and to be prepared for their expected rise, is to make payments equivalent to what a higher rate, say 6 per cent, would demand from the get-go.
Kathy Nguyen, a mortgage specialist in Vancouver, recommends this approach. “I tell buyers if you are a bit of a risk taker, go with a variable rate mortgage, but continue making monthly payments based on the higher fixed rate. Yes, the monthly payment is more than what’s required, but the entire additional amount goes toward paying down principal.”
Mr. Gaetano has a similar philosophy, regardless of whether a borrower holds a variable or fixed rate mortgage. “There’s no use in worrying about where interest rates are going to go,” he says. “The focus should be on getting rid of your debt.”
