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Lifestyle is key to affordability If children are in your future, consider the cost April 30, 2007 TERRENCE BELFORD SPECIAL TO THE STAR 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 MonsterMortgage.ca'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 periods. "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 needs. Lenders even offer 100 per cent financing now, without the cash-back wrinkles that used to characterize such deals, Gaetano says. "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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