What's your "risk tolerance" for mtg balance?

11375 Views 33 Replies 18 Participants Last post by osc, Oct 19, 2009

seven3

Discussion Starter · Oct 2, 2009

I was wondering if there's been a cultural shift to accept larger mortgages, etc.

I was wondering, what are people's risk tolerance here on this forum, in terms of mortgage size vs. total family income.

I hear many stories of people taking 500k, 700k + mortgages just to buy homes...when their incomes are in the 150k range...what are everyone's thoughts?

What would your max be based on your income? I'm thinking total income of 175k should work out to 370k mortgage principle at most...but that's just me...

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SlightlyMad

· #2 · Oct 2, 2009

If you want to be a true pessimist

(1) Take the lower of the two incomes and pretend it isn't there. Buy a house you can afford on the single income, rather than on both incomes combined. Illness, parental leave, unemployment is hard to account for, but dropping the lower salary would be the largest risk factor.

(2) Be pessimistic, assume inflation and whether you can continue to afford your home at 8% interest rates.

(3) Don't forget realistic heating costs; they may continue to rise. Add 25% to the gruesome heating costs of 2007-2008 for heating/cooling.

For example, if you type into the CMHC calculator 12000 Gross Monthly Household Income, A Down Payment of 40000, with a 5% interest rate amortized over 35 years, with property taxes of 300 and heating costs of 200 (assuming no other debts) ... the calculator says you can probably handle a 3340 mortgage payment and a $700K home.

Changing the gross monthly income to 8000, upping the interest rate to 8% from 5% and increasing the heating costs to 250 only preapproves you for a $326000 home.

That feels more correct to me.

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Berubeland

· #3 · Oct 3, 2009

I am in favor of buying what you need instead of what you can afford.

I see no point to buying a huge mansion just because you can. Buy the least expensive house that will suit your needs and pay it off as soon as you can.

Then live there. It's nice not having to pay a mortgage.

PMREdmonton

· #4 · Oct 3, 2009

One rough guide I've heard is that your house shouldn't cost more than 3 times your gross annual income. So if you make $150K/yr that would translate into a house for no more than $450K.

Rickson9

· #5 · Oct 3, 2009

seven3 said:
I was wondering if there's been a cultural shift to accept larger mortgages, etc.

I was wondering, what are people's risk tolerance here on this forum, in terms of mortgage size vs. total family income.

I hear many stories of people taking 500k, 700k + mortgages just to buy homes...when their incomes are in the 150k range...what are everyone's thoughts?

What would your max be based on your income? I'm thinking total income of 175k should work out to 370k mortgage principle at most...but that's just me...

Yes I don't understand this. From everything that I have read, my wife and I are supposed to be financially secure, however, we do not feel comfortable with some of these advertised large mortgages.

We would feel secure with a mortgage that we could carry if one of us stopped working. Having said that I just don't like the idea of putting debt on an asset where we can't claim the interest payments against other income - it just seems like a waste of good money.

BigPom

· #6 · Oct 4, 2009

PMREdmonton said:
One rough guide I've heard is that your house shouldn't cost more than 3 times your gross annual income. So if you make $150K/yr that would translate into a house for no more than $450K.

Is that even possible here in Vancouver?

BigPom

· #7 · Oct 4, 2009

seven3 said:
I was wondering if there's been a cultural shift to accept larger mortgages, etc.

I was wondering, what are people's risk tolerance here on this forum, in terms of mortgage size vs. total family income.

I hear many stories of people taking 500k, 700k + mortgages just to buy homes...when their incomes are in the 150k range...what are everyone's thoughts?

I have friends if they are single take out about $300k in mortgages, or if they a couple, mortgages of around $500k are common. Although it seems like a lot, it is all in the affordable range. They are not make great money, but decent money (ie $50k salary for each person). Their monthly payments end up being around $2k which is equivalent to their rent.

Click to expand...

seven3

Discussion Starter · #8 · Oct 4, 2009

hmmm..I don't know, I guess my tolerance is a bit lower than those taking out $300k mortgage on single incomes...or borrowing $500k based on $100k total income for a couple...

That sounds like asking for a world of hurt if things change direction. Although, here in Vancouver, I guess it's the only way....

brad

· #9 · Oct 4, 2009

I'm also of the "buy what you need, not what you can afford" mentality. We bought a house that cost less than half what we were prequalified to buy, and we love this place; we never intend to move. Taking out a smaller mortgage also allowed us to afford a shorter term (15 years) and accelerated payments, hence a lot less interest to pay, plus it allows us to afford making larger lump-sum payments every year. Ultimately we should be able to pay off our mortgage in 10 years or less instead of 15, and we'll be throwing away a lot less money in interest than we would have otherwise.

In my mind, paying interest to a bank is just as bad or worse than paying rent to a landlord, so my goal has always been to save up for as high a downpayment as possible and buy the smallest and most affordable house that meets the "we love it" criterion. For me, it's not really an issue of risk tolerance, it's an issue of avoiding interest.

FrugalTrader

· #10 · Oct 4, 2009

I'm fairly conservative when it comes to non deductible debt, so my rule of thumb is the mortgage should not be larger than 2 times annual salary.

Sampson

· #11 · Oct 4, 2009

I think one of the issues with debt:salary ratios is that it doesn't take into account other assets.

The total of the mortgage:salary we carry is at 3.7. However, because we have a good amount of other liquid assets, we could be at a debt:salary of about 2.

We don't spend much, so are on a schedule to pay off the mortgage on our principle residence in about 10-11 years (likely further accelerating with raises/promotions etc).

homeinboca

· #12 · Oct 5, 2009

I guess I must be old fashioned - I bought my home 13 years ago after scratching and saving up the 25% downpayment of $65,000 for a $260,000 home in Toronto.

I'm still in the same house, having resisted moving up to a monster home with a monster mortgage that many of my friends got into. It's in a great neighborhood with lots of schools, shopping and transit nearby,and worth almost double what I paid.

Now my mortgage is paid off and I'm putting lots of money away for my retirement in 8 years. I would hate the idea of having a large mortgage at this or any other stage of my life.

iherald

· #13 · Oct 5, 2009 (Edited)

I just got my first mortgage, for more than I originally planned. It's for $340k, which I can easily afford (I don't have a car or many toys) while still maxing out my RRSP.

That said, the reason I stretched a little was because it's a legal duplex and the rent will end up being 90% of my mortgage payment. The money I save on my mortgage will be lump sum payments each year.

I ran the math at 6% mortgage payments and I can barely afford it (if you subtract the rent) and I continue to max out my RRSPs. But I have a five year fixed rate and I'm a young lawyer so my income will increase enough to cover the difference.

I would have loved to buy a house without a mortgage or a smaller one, but I bought on a fantastic street across from a park and got an income property. So I'm comfortable with the decision.

Berubeland

· #14 · Oct 6, 2009

That sounds very reasonable iherald. Good work

Ben

· #15 · Oct 6, 2009 (Edited)

Buy what you need, not what you can afford indeed.

I would never go above 3x salary. When we bought 4 years ago, we took on a mortgage 2.7 gross income, more by luck than sound planning. We now carry a mortgage 1.1x salary, through aggressive mortgage reduction and modest salary increases. We can now carry the household on one salary, which is a nice place to be as we start to think about starting a family.

Sampson makes a good point too – it’s worth considering the asset/debt ratio as well as the debt/salary ratio.

Borrowing ½ million on 100k salary is mad. But I'm a conservative sort.

Slightly Mad says - “Illness, parental leave, unemployment is hard to account for”. Wise words. Unfortunately, many will learn this the hard way.

sprocket1200

· #16 · Oct 7, 2009

this one is easy, the buyers, real estate agents, brokers, all wanted 40 yr mtgs. unbelievable that the gov't was smarter and took it back to 35 yrs.

of course, all these people who didn't save up for a down payment said 'oh, we will pay it off sooner...' sure, sure.

have your cash ready, when rates rise and inflation takes off, buy all those houses on the cheap!

Berubeland

· #17 · Oct 7, 2009

They want you to pay off your house the same way they want you to pay off your credit card. Minimum Payments right on time every month. Maximum profits and you just send your pays directly to your friendly neighborhood banker.

You can even buy your furniture with low weekly payments if you like

michika

· #18 · Oct 7, 2009

When we bought last year we bought for our needs, and we had a pre-established cap of what we were willing to take on. We were pre-qualified for $580K or something in that neighbourhood, and the payments on that scared me. Originally we wanted nothing higher then $300 but couldn't find a property that suited our needs and requirements and ended up putting out a bit extra, $365, but got everything we wanted, plus a few unexpected bonuses.

I still feel that our mortgage is huge to me, but I have friends who have taken on much more. I'm very aware of the cost of our home, and am very focused on paying it down as quickly as possible. I have a goal to pay it off in under 10 years, while still maintaining my other goals.

I definitely agree though, more and more people think its acceptable to take on these huge mortgages and these huge amounts of debt. My parents live in a similar home 3 blocks from mine, they paid $65,000 for their home 25 years ago, and everything has appreciated to over $400K.

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michika

· #19 · Oct 7, 2009

Berubeland said:
They want you to pay off your house the same way they want you to pay off your credit card. Minimum Payments right on time every month. Maximum profits and you just send your pays directly to your friendly neighborhood banker.

You can even buy your furniture with low weekly payments if you like

That is so not right. The whole idea makes me really uncomfortable. Minimum payments are a death sentence.

DrStan

· #20 · Oct 7, 2009

Technically, the maximum house value my wife and I could afford is $1,063,830 based on the CMHC calculator. That's almost unfathomable. We paid $277K for our three bedroom single in Ottawa four years ago, which is neatly paid for now. It's a perfectly nice house with more room than we actually need. I've never quite understood the large number of my friends who go out and purchase mansions which cost so much more in taxes, heat, insurance, etc. I'd rather smile thinking my humble abode is all mine. But we need big spenders to keep the economy going, so I can't complain too much. Savers are so uncool.

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