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The missing pieces in banks' real-estate math Add to ...

Like income taxes and contributions to registered retirement savings plans, for example. "If we're supposed to save for retirement and if we're paying average taxes of about 23 to 25 per cent, there isn't much left for housing," Prof. Milevsky said.

And yet, there are many more fixed expenses to juggle. Groceries, transportation costs and daycare are among the ones listed by Laurie Campbell, executive director of the credit counselling agency Credit Canada.

On top of that, consider the sudden, staggering expenses that homeowners must inevitably cope with. "People get themselves so bogged down," Ms. Campbell said. "They get into their home and their roof needs repairing three years after they move in. There's $3,000 to $4,000 right there."

A typical way of managing sudden expenses is to tap into a home equity line of credit, where people borrow against the value in their homes. But credit lines represent added debt that can push people offside on the debt measurements that lenders use when setting up mortgages.

Rising interest rates put even more pressure on affordability. Mortgage rates are still close to all-time lows as a result of the financial crisis, but sooner or later they will rise back to normal levels. It's just a matter of time until mortgage holders are affected - variable-rate mortgages get more expensive gradually, while people with fixed rates pay more at renewal time.

The Bank of Canada has estimated that 6.1 per cent of households were already spending 40 per cent of their personal income to carry debt in 2009. The bank figures that this number will rise to 7.5 per cent in mid-2012 if mortgage rates rise to pre-recession levels.

A wave of defaults is the worst case if rates surge and people can't afford the high-priced homes they bought in recent years. But economist Benjamin Tal of CIBC World Markets doesn't see this happening.

"You will have defaults rising - they'll be higher than they are now - but not in a very significant way," he said. "Remember, interest rates rise for a reason - the economy is improving."

How to Protect Yourself

Protect yourself against buying more house than you can afford and you help prevent the kind of national housing catastrophe that is into its fourth year in the United States.

Mortgage lenders measure your debt load in relation to your income to assess how much you can borrow to buy a home. Tempted to buy as much as they'll lend you?

So were a lot of the home buyers who later ended up coming into the Toronto offices of Mr. Schwartz's credit counselling agency. "That's a trend we've seen among our client base for a while now," he said.

His preferred solution is to take a completely different tack than lenders do in assessing how much mortgage you can handle. Start by putting together a budget that sets out the percentage of your net income that will go to all housing costs, including mortgage, property taxes and home insurance.

"By and large, we tell people you should probably only spend about 25 per cent on housing," Mr. Schwartz said, before acknowledging that people living in high-cost cities like Vancouver or Toronto may have to go as high as 30 or 35 per cent.

Vancouver mortgage planner Robert McLister said he starts his evaluation of how much a home buyer can afford with the standard measures used by all lenders, the gross debt service and total debt service ratios. He then asks clients whether they have savings that they could depend on if they lost their job, and how much money they have left over at the end of the month.

"If someone tells me, 'I have $50 left after all my debts are paid each month and I want to buy a $500,000 house,' then that's a warning sign."

If at some point your mortgage debt becomes unmanageable, you can ease the load by taking longer to pay off the loan. This is called extending the amortization period and Mr. McLister said it can be done through a routine refinancing of your mortgage (expect to pay a few hundred dollars for this transaction).

The longer your amortization period, the smaller your payments. The tradeoff is that you'll pay more interest and take longer to be mortgage-free.

"You do what you have to do," Mr. McLister said. "But even if the amortization is 25 or 35 years, that doesn't lock you in for life. When you're up for renewal, you can reduce the amortization period if times are better."





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