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									Lifestyle is key to affordability
If children are in your future, consider the cost
April 30, 2007

Five years ago, figuring out the size of the        to terminate or the potential to double up on
mortgage you could afford was simple                payments and retire the mortgage early.
mathematics. Today, affordability nearly            "Actually, I would say affordability is both
defies definition. Residential mortgages have       mathematics and lifestyle," says Robert
become        an     all-you-can-eat     buffet.    Gascon, an independent broker with his own
Affordability has become a matter of appetite       company, Redwood Mortgage Corp. "There
for debt.                                           are still tests on income, but they have
"It used to be that lenders wanted at least a       changed. For example, now many lenders will
10 per cent down payment, offered only 25-          offer 100 per cent financing based on credit
year amortization periods and then based the        scores and those old 32 per cent and 40 per
size of the mortgage solely on family income,"      cent rules.
says Paula Roberts, a mortgage broker in the        "But affordability is more than what people
Unionville office of Mortgage Intelligence Inc.     show on paper."
"A limit of 32 per cent could go toward             He cites the example of two couples: one has
mortgage payments and taxes and no more             a single child, the other has four. Both are
than 40 per cent could go to servicing all          seeking a $250,000 mortgage and both would
forms of debt.                                      need 32 per cent of their family income to
"Today the first thing that surprises people is     make monthly payments and taxes.
just how large a mortgage they can get. The         "That is where lifestyle comes in," he says.
old rules often don't apply."                       "The couple with four kids is going to have a
With lenders eager to place mortgages and           lot more demands on their income than the
consumers still thronging to new project sales      couple with just one. While on paper that
offices and real estate agencies, the choice of     $250,000 mortgage is affordable, in real
mortgage       –    including    size,   terms,     terms it may not prove to be affordable at
amortization and rates – has become a               all."
cornucopia of options. Affordability has            Affordability comes down to understanding
become not a matter of fixed limits, but of         lives, says Paul Rayment, vice-president of
selecting the product that best suits lifestyle     Foremost Financial Corp. While he now works
as well as income.                                  in the field of commercial mortgages, he
"We deal with about 40 lenders and each of          spent 18 years on the residential side, and he
them has between 10 and 15 different                says one of the lessons learned is that
mortgage products," Roberts says. "The goal         borrowers should not start by finding a house
is to find which of them best suits the             and then figuring out whether they can afford
borrower."                                          it.
Affordability goes much further than those old      "Never do that," he says. "That can create
simple rules of math, says Vince Gaetano, in        enormous pressures and skew rational's Concord office.                thinking. Instead, start by being honest about
"Today it is all about understanding a              your lifestyle and where your income really
borrower's lifestyle. The goal is to get a          has to go."
mortgage they can live with. It is not about        Borrowers have to be reasonable about such
getting the best interest rate. There are           things as how much they are willing to spend
products out there that offer rock-bottom           each month on housing, taxes, utilities and
rates, but they are basically shell mortgages."     upkeep – not how much they can spend in
By shell mortgages, he means a mortgage             theory. They have to consider potential future
that contains none of the clauses and terms         life events, such as the potential for pay
such as pre-payment options, reasonable fees        raises, a spouse taking time off to have
children, future inheritances, how long they       "They move in and find they need a fence,
plan to occupy the home.                           and it has to be wood, because that is what
"For young couples looking at affordability, a     the neighbours want. That could run $5,000
future filled with children has to be a key        to $10,000," he says. "Then there will be
factor," Gaetano says.                             landscaping costs, repainting, new drapes,
"They are almost certainly going to have kids,     new furniture, and fees to hook up utilities.
so what happens when the wife can't work?          "It is not uncommon for young couples to
Have they thought about that and arranged a        face another $10,000 to $20,000 of debt
mortgage that allows them to reduce or even        within six months of moving in."
skip monthly payments?'' he asks.
"I get calls all the time from people saying the
wife's maternity benefits won't kick in for six
weeks and the bank won't allow me to skip a
payment. What can I do?"
Roberts says she usually starts by asking a
would-be homeowner what they pay in rent
and whether they can easily afford that
monthly payment. She then translates that
rent into what a mortgage payment would be
at different interest rates and amortization
"If their rent is $1,250 a month, then at
today's 5 per cent rates that carries payments
for a $215,000 mortgage, based on a 25-year
amortization. But at a 40-year amortization, it
means carrying a mortgage of $260,000."
The next step is to work out the terms the
borrower feels are needed to offset
foreseeable life events. With all that detail,
Roberts negotiates with lenders for the
mortgage that best suits the borrower's
Lenders even offer 100 per cent financing
now, without the cash-back wrinkles that
used to characterize such deals, Gaetano
"Formerly, borrowers used to need at least 5
per cent as a down payment. Lenders got
around that by giving borrowers 5 per cent
cash back on the loan and financed the
balance at 6.5 per cent," he says. "The
condition was that if you sold within two
years you had to repay that 5 per cent on top
of the fee for ending the mortgage."
Today, however, lenders will offer 100 per
cent mortgages if borrowers meet the 32 per
cent and 40 per cent criteria and have a
Beacon score (credit worthiness rating) of
650 or better.
Gaetano also cautions that new homes may
bring extra overlooked expenses that heavily
impact affordability.

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