The prospect of being on the hook for mortgage payments for the next quarter-century would make the heart of every first-time buyer pound. Signing the dotted line for the largest debt you\u2019ll ever owe is, at the very least, a stressful decision.<\/p>\n
\u201cFor most people, by and large, it\u2019s the biggest expense they\u2019ll ever have in their life,\u201d says Dr. Moira Somers, a family wealth psychologist and executive coach based in Winnipeg. \u201cThere needs to be a \u2018gulp\u2019 response to that and a real determination about, \u2018Is this the right time? Is this the right place, the right decision?\u2019\u201d<\/p>\n
Reducing stress caused by mortgage debt can begin before your pre-approval, mortgage stress test or saving for your down payment. Determining if a mortgage fits your needs, goals and is a choice of your own making beforehand is an important step. The Financial Planning Standards Council found that one in two Millennials, those between the ages of 18 and 34, feel pressure to financially keep up with their colleagues. Millennials also feel the most embarrassment over a perceived lack of control over their financial situation compared to other generations, according to the FPSC. This pressure, combined with a lack of financial education and subpar communication between couples when purchasing together, eventually leads to high levels of mortgage debt stress.<\/p>\n
\u201cWe need to make sure that people aren\u2019t being pressured into homeownership just because someone thinks it\u2019s the financially prudent thing to do. For many people, it is not the prudent thing to do,\u201d says Dr. Somers.<\/p>\n
If you\u2019re worried about taking on a mortgage, don\u2019t sweat it. We asked Dr. Somers and mortgage broker Elan Weintraub for their advice on four essential questions first-time homebuyers should ask themselves to avoid mortgage stress.<\/p>\n
1. Are you a victim of Economic Outpatient Care?<\/strong><\/p>\n Asking the Bank of Mom and Dad for help with home buying is common these days. In a poll conducted by CIBC, 76 percent of Canadians said in 2017 that they would financially support their adult children. In hot real estate markets such as downtown Vancouver, where the average price of a new build condo is hovering around $2,000 per square foot, it can be tough for first-time buyers to meet mortgage requirements. Parents may step in to co-sign on the mortgage or offer money towards the down payment to help their children secure homeownership. While Dr. Somers says this is a kind gesture, parents should be cautious about giving their children a false sense of financial security.<\/p>\n \u201cParents will give a downpayment so that the banks will give the kids a loan, a mortgage,\u201d says Dr. Somers. \u201cSometimes, these kids have no business being in a home because they do not have a solid enough income stream to merit it.\u201d<\/p>\n Dr. Somers refers to the economic theory of \u2018Economic Outpatient Care\u2019 from the book The Millionaire Next Door. The authors, Thomas Stanley and William Danko, explain that adult children of wealthy parents often fall victim to a false sense of financial stability if they receive monetary support. This causes them to purchase homes in affluent neighbourhoods beyond what they can afford, leading to mortgage stress, house poorness and financial instability.<\/p>\n Dr. Somers says that this concept follows a common problem she sees today: young buyers are pushed into homeownership by their wealthier parents who still view owning real estate as an expectation of adulthood.<\/p>\n \u201cFor generations, there was this notion that if you could buy, you ought to,\u201d says Dr. Somers. \u201cThere really weren\u2019t a whole of compelling reasons to rent unless you couldn\u2019t afford not to, or if you knew you were going to be transient.\u201d<\/p>\n Even as homeownership becomes more difficult to achieve in expensive real estate markets, Dr. Somers says these parental expectations still exist. If new homebuyers are to avoid future stress caused by mortgage debt, Dr. Somers says it\u2019s best that parents and their children get on the same page as to who\u2019s paying, how much, and if a mortgage is the better choice over renting.<\/p>\n \u201cYoung people, and their parents and older people who are advising them, need to really be aware of the fact that things have shifted,\u201d she says. \u201cWhat used to be excellent advice for generations previously, it\u2019s a different landscape now.\u201d<\/p>\n 2. Are you financially conscious?<\/strong><\/p>\n In her years as a psychologist, Dr. Somers has met many people and couples who resist being \u201cfinancially conscious\u201d \u2014 being totally aware of your current financial situation.<\/p>\n A lack of financial consciousness can manifest as stress and symptoms such as hypervigilance, spend-binging and secret shopping from spouses. This is often the result of a homebuyer\u2019s lack of understanding about their expenses, along with patterns of poor saving and communication. Homebuyers who didn\u2019t account for the additional costs of ownership prior to buying, and who are suffering from financial stress, can accumulate more debt in an attempt to remedy their situation.<\/p>\n \u201cIf you\u2019re not putting money aside to cover [expenses], you have no option but to immediately incur debt when they come along,\u201d says Dr. Somers. \u201cThat\u2019s where we get into this terrible cycle of needing to apply for home equity lines of credit and consolidations, which have a physiological effect of making you feel like you\u2019ve zeroed the debt \u2014 but you have not zeroed the debt. You have incurred new debt on top of that massive mortgage.\u201d<\/p>\n One strategy to becoming financially conscious, according to Dr Somers, is to examine periodic expenses prior to ownership \u2014 expenses that aren\u2019t an emergency but aren\u2019t part of your monthly home budget either, such as annual home insurance payments. Weintraub also says paying over your original mortgage budget can set you up for stress down the road. Conducting a thorough pre-approval process beforehand will set expectations before you buy.<\/p>\n \u201cUnderstand your limits are and what your situation is, because sometimes a lot of stress is, \u2018My budget is $700,000,\u2019 and then sure enough, they buy at $775,000,\u201d says Weintraub. \u201cThat\u2019s going to create stress. If you\u2019re thinking of going to $775,000 in that scenario, have a discussion with your mortgage broker in advance of buying it, not after.\u201d<\/p>\n 3. Will you rent out that spare bedroom?<\/strong><\/p>\n If you\u2019re stressing that your mortgage payments are just a drop in the endless mortgage loan bucket, Dr. Somers recommends turning your home into an active revenue generator.<\/p>\n \u201cIf you\u2019re going to buy a house, there\u2019s ways of making that work for you,\u201d she says. \u201cPerhaps you can rent space in your garage, if you\u2019ve got an extra bay. Turn this house into not only something that you pour money into, but that can help you pay for itself.\u201d<\/p>\n Homeowners have many options to earn money from their extra space: renting a room out on Airbnb, flipping the basement into a rental suite, or leasing out the garage as a storage unit, to name a few. However, keep in mind that this extra cash will help you pay the mortgage, not qualify for one. Your granny-flat rental, or other side hustles, will not necessarily be counted as income by future mortgage lenders.<\/p>\n \u201cLet\u2019s say the husband drives Uber, and the wife does some photography on the side, and they rent out their basement. Realistically, they\u2019re not financially stressed, but the bank is arbitrarily thinking that they\u2019re stressed,\u201d says Weintraub.<\/p>\n Extra revenue should be treated as a supplement, not a replacement.<\/p>\n 4. Is renting the better option for now?<\/strong><\/p>\n The decision to keep renting might not just make financial sense, but it may also be more practical. If you don\u2019t plan on staying in one place for at least five years, Weintraub says committing to a mortgage might not make the most sense.<\/p>\n \u201cIf you\u2019re not sure where you\u2019re going to be and you\u2019re thinking of moving to the West coast, then renting might be a better solution because it\u2019s easier to leave a rental than selling a property,\u201d he says.<\/p>\n Selling your home usually costs four to five percent of the home value, plus transfer taxes, according to Weintraub. Selling your home after less than five years of owning it could cost you in mortgage penalties and other fees. Hence, if you\u2019re looking to avoid mortgage debt stress, Dr. Somers says it\u2019s important to determine if buying is the best choice for yourself, not to mention your relationship.<\/p>\n One of the most common causes of divorce is fighting about money. Some couples in their second or third marriages, says Dr. Somers, have decided to forgo mortgages altogether and stick with renting to avoid money conflicts. Engaging in good planning and communication in all aspects of mortgages and finances should eliminate money stress, she says.<\/p>\n \u201cWhen stress gets to a certain level, it doesn\u2019t create loveliness in our lives or our behaviour.\u201d<\/p>\n