Can we buy a house please?
June 14, 2011 5:31 AM   Subscribe

I'm thinking about buying a home instead of renting because interest rates are really good at the moment. But with other variables factored in, can we handle this? Detailed financial info to follow.

We live in Toronto and are in our early 30s. We are looking at the east end where there are a handful of houses on MLS at less than $400k. Together we have a total of $60,000 in savings and would put 10% down. We currently take home $77k, but this could change to $68k because my husband wants to go down to working 4 days a week, but could likely pick up some freelance work on the side. Compared to renting, buying will definitely cost more since we only pay $1220 in rent, but the benefit of a yard, a second bathroom and doing what we want with the place is something we'd be willing to pay for as long as it was within our means. With the 5-year variable with fixed montly payments at 2.85% at my bank, it seems like it could be.

To add a little more complication to the mix, my husband's also recently had colon cancer and a total proctocolectomy, but didn't need radiation or chemo. He gets his first biennial check up next year. Does this have an impact on mortgage insurance? Should we forget buying since the possibility of a recurrence will always be there? He has some long-term disability insurance at work, but it would still be drop in income if he were to get sick again.
posted by anonymous to Home & Garden (19 answers total) 2 users marked this as a favorite
Anon: "With the 5-year variable with fixed montly payments at 2.85% at my bank"

I'm assuming this is actually referring to a 5/1 ARM, which is not a mortgage you want to get into in your situation. After 5 years, your rate magically readjusts, and it'll likely be much higher. There may also be a balloon payment. Budget yourself against a fixed rate mortgage. A 30-year fixed mortgage is likely closer to 5%. (In the U.S., which I assume is essentially the same as Canada in this regard)

Offhand, I think your income can't sustain owning a home in the price range you're looking at. Have you run any of your numbers through a mortgage calculator? The Suze Orman method is great here- figure out your expected mortgage payments for your target price, and set aside that much each month on top of your rent. If you can manage that for a year, move forward, and you've saved that much more cash.
posted by mkultra at 5:40 AM on June 14, 2011 [1 favorite]

All complications aside that seems like way too expensive for your income.
posted by ghharr at 5:58 AM on June 14, 2011 [1 favorite]

If I were in your shoes, I wouldn't dream of thinking of buying. 400k is WAY too much of a mortgage for what you say you are making now. I would be looking more in the 100k range. Plus, 60k down is not enough. I'm not sure how lenders work in canada, but here in the US, you have to pay PMI, which is alot of money every month, if you can only cover 10%.
posted by TheBones at 6:01 AM on June 14, 2011

Yeah, the ARM mortgages really aren't a good idea. That is one of the ways lots of people lost their homes- the bought a little more house than they could afford and couldn't make the payments when the rate adjusted, and also couldn't refinance because the house didn't appreciate enough.

With property taxes, your payment will likely approach 40-50% of your take home. That's a little high, to me.

If you are relatively sure your income won't drop (or you can insure your way out of that possibility) and are fairly sure you might be able to increase your income, you might be able to do it by living on a tight budget for a few years until your income catches up.

The pros of buying are this: your "rent" payment is (more or less) fixed. It is higher now, but in 10 years, what would rent be? In 30 years (or less if you increase your income such that you can make extra payments), your "rent" drops to almost nothing.

Does this have an impact on mortgage insurance?

Are you talking about PMI? In the US at least, PMI isn't for you. It is for the lender. The rationaile is that the lender has over-extended themselves and wouldn't be able to recoup their investment if you default early. So you have to buy them some insurance to cover the difference in order to get them to loan you money.
posted by gjc at 6:03 AM on June 14, 2011

Yep, it's too expensive and the wrong loan. Do the math again on a 30 year fixed. This varies by market, but a good guideline is to keep your total mortgage payment (don't forget that, at least in the US, that includes insurance and taxes, so is more than just your principal + interest payment) at less than either 1/4 or 1/3 of your total income.

FWIW, I'm in the US, and make just a touch over what you're making. When I was shopping for homes I set my upper limit at $300,000, even though I could get a loan for more. That was with 20% down, no PMI.

Also, to expand on mkultra's point, mortgage rates are low now and will go up. You want a 30 year fixed rate so that you don't get hammered with high rates 5 years from now.
posted by craven_morhead at 6:06 AM on June 14, 2011

You're going to have a mortgage of at least 300K. And yes, mortgage rates are extremely low right now and they may remain there because the economy is iffy, but don't count on it. At even 5% interest on a 30 year mortgage for 300K, your mortgage payment will be $1,610.46. Then you can count on paying about $600 more a month for home insurance, heat, light, water, waste management fees, and property taxes. On top of that you will have to make any necessary repairs and renovations. Can you handle that?

I'm not going to tell you yay or nay. When I bought my house in 2006, I had roughly half the mortgage you will (on a 25-year mortgage), though I had well under half the household income you do. I bought a place with potential for a basement apartment, though, renovated it, and rented it out, which helps a lot. And it's been fine, but I think in your case it maybe it would be a better idea to rent for two more years and get a really solid down payment for your home before you buy. With the 30 year mortgage at 5% you'll be paying $14,899 in interest your first year alone, and you won't have the house paid for until 2041. If I were you I'd want a bigger down payment so I could shave down both those numbers significantly.

When I got mortgage insurance in 2006, I was not asked any questions about my health. I'd ask a mortgage officer or realtor about it though.
posted by orange swan at 6:06 AM on June 14, 2011

A 30-year fixed mortgage is likely closer to 5%. (In the U.S., which I assume is essentially the same as Canada in this regard)

It isn't. The 30-yr fixed doesn't exist in Canada, for starters, so applying American assumptions to the very different range of mortgage products available north of the border (example) isn't going to work here.
posted by holgate at 6:06 AM on June 14, 2011 [4 favorites]

To everybody else: 5 year terms are normal in Canada and terms above 10 years are almost unheard of (and most of the world actually; one of the many reasons Canada's banks are financially sound). It get's very expensive to have terms longer than that (See rates here.). Banks here aren't as subsidized for the losses and have to carry forward the risks if the central bank increases interest rates. Note: amortizations can still go up to 30 years, though.

My opinion: Mortgage rates are so low that the difference in interest payments between 2% and 3% are not that much that it would be worth it to lock in. Interest rates are almost guaranteed to start going up as well. If I were to buy in your position, I'd make extra payments to get that principal down.

However, I think you'd be stretching yourself buying at this point. You'd be left in a terrible position in 5 years when interest rates are higher and/or housing prices decline. On top of this, bidding wars are the norm within the city. Houses within the city of Toronto rarely sell at MLS prices. You'd be taking a rather large risk getting a mortgage that large at your income, even if your husband stays healthy.
posted by hylaride at 6:19 AM on June 14, 2011

Holgate is correct. When I bought my house I think the longest I could fix the rate was five years. The numbers I gave you assume are more calculated on an average rate that you'll be paying over 30 years.

I should also have suggested that you and your husband sit down and work out a monthly budget that includes all your costs — not only your housing costs, but also transportation, food, phone and internet, clothing, household furnishings, Christmas and birthday presents, charitable donations, entertainment and vacations — everything. Round up a little because things always cost more than you think. Then talk about whether you can comfortably live with that budget.
posted by orange swan at 6:20 AM on June 14, 2011

You have far too low a down payment for that mortgage and that income. Make a budget, spend a year or two saving up and figuring out what you can live on.
posted by jeather at 6:35 AM on June 14, 2011

Agreeing with much of the above. Yep, the market is pretty hot right now and rates are low, but both of these things can change pretty quick. Most of what you can get in the $400k range in the west end these days either needs work, or goes for $450+ in multiples.

Because so many people in your situation are buying, the rental market for awesome 1-2 bedroom apartments is great. Seriously.

My wife an I are in your demographic, and we have so many friends who bought fixer-uppers and spend all their time working on them, or haven't gone on vacation in 3 years because their mortgage and renos are killing them. You're not missing out. All the places my friends have that I am truly jealous of are rentals.

The mortgage market is different here than the US, but it is true that you have to go shopping for a new mortgage in 5 years. Your payments would likely be higher.
posted by thenormshow at 6:48 AM on June 14, 2011

If renting is cheaper than buying with rates at 2.85% for the love of god rent. Even before you get to all of the other good points made by others on this thread.
posted by JPD at 6:48 AM on June 14, 2011

Agree with everyone saying the deal is above your ability to comfortably handle financially. I would also add that you need to find a more affordable rental.
posted by Thorzdad at 7:41 AM on June 14, 2011

We currently take home $77k, but this could change to $68k because my husband wants to go down to working 4 days a week, but could likely pick up some freelance work on the side.

You should assume that you will only be getting $68,000, then, for the purposes of whether you should get a mortgage or not.
posted by grouse at 9:49 AM on June 14, 2011

Huh, disregard my answer regarding the 30 year then (though it may be helpful for USians). Aside from that, it looks like you've got a pretty strong consensus here.
posted by craven_morhead at 10:40 AM on June 14, 2011

I'm going to add a general bit of advice that I've given a lot recently: If you feel like it's going to be a stretch, for the love god gave little green apples, don't do it. That includes even the barest hint of a feeling.

With your income and savings level, you'd be hard pressed to correct any deficiencies that the house has or anything that goes wrong. Things can rapidly go tragically wrong with houses, especially older houses, especially in your climate. My girlfriend and I make almost twice you do, my house isn't worth half what you're looking at, and we're sometimes pressed to keep up with renovation and deterioration.
posted by SpecialK at 11:39 AM on June 14, 2011

I agree with what has been said here, on the assumption that when you say you "take home" $77K you are actually referring to your gross household income. If you have $77k (or even $68k) after taxes, etc., then the situation would of course be different.
posted by Urban Hermit at 11:04 PM on June 14, 2011

Mod note: From the OP:
Yes, taking home $77k means it is all ours or our current *net* pay after all deductions. Our gross income is $114,500. But maybe that doesn't make that much difference to the total costs of homeownership. I should also add that we've saved $60,000 in the course of three years after being in school etc. and have been able to comfortably automatically deposit $700 every two weeks into a savings account for the past six months on top of the $1220 in rent.
posted by mathowie (staff) at 7:20 AM on June 15, 2011

Yes, there is a big difference in your net and gross pay when it comes to calculating a mortgage. Your gross pay is what your eligibility is based on. If your gross pay had been $77k the maximum house you could have gotten would be $325,000. Since your gross pay is almost $10k a month, in theory you can afford a $540,000 house but that would be financial suicide, especially since the Toronto market is still over-priced. (That is assuming you put $40,000 down and agree to pay about $2,500 a month for your mortgage plus another $500-1,000 in property taxes and insurance each month). If you owe any student loans (I am assuming not because you have savings) then you would qualify for less. But look at your budget now and imagine paying around $3,500 a month out of the $6,000 take home pay. Would you still be able to save $1,400 a month? Would you be able to afford a new furnace if the old one broke, or a plumbing disaster? Does your lifestyle lend itself to scaling back to save money? A smart move is to buy a house you can afford on just one salary (I also have a husband with health problems and had to suddenly adjust to one income shortly after signing a mortgage with a shorter amortisation and higher payments). Are you thinking of children in the next ten years (along withteh costs and drop in income) Although I have a lot of issues with this article, it certainly has food for thought.

A lot of the "under-priced" houses are actually just ploys to get bidding wars started and have emotionally invested people over-extend themselves to buy a fixer-upper money pit (and I am specifically talking about the houses iI've seen in the east end here).

As I am sure you have learned, everyone ready to offer you advice is financially invested in getting you to buy the most expensive house you can afford. I know it is hard when it seems like so many other people are buying houses, but it is amazing how many of those homes were actually financed by their parents. Keeping up with the Jones' is one thing, trying to keep up with their parents too is nuts. One organisation that is balanced and not about getting their hands on your money is CHMC (Canadian Housing and Mortgage Corporation - funded by the Federal gov't), have a look at their website.

For the love of good don't buy a condo in Toronto
posted by saucysault at 5:14 PM on June 15, 2011

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