It’s not unusual for homebuyers to be shocked by the amount of debt lenders will let them take on, but the U.S. sub-prime mortgage crisis is making banks on both sides of the border more cautious.
With the Ontario economy slowing and financial market fallout continuing over the meltdown that has pushed mortgage rates higher in Canada, banks are making sure people know what they are getting into.
“We are being more cautious,” says Joan Dal Bianco, a mortgage expert and vice-president of real estate secured lending at TD Canada Trust. “We have a discussion about how much you can really afford.”
She notes house hunters here don’t face the same dangerous choices that got so many Americans in over their heads.
Unscrupulous U.S. lenders were pre-approving borrowers for mortgages at initial “teaser rates” as low as 1 per cent — often not warning that payments could rise by a third or more when the cheap rates expired. Scores have walked away from their homes and mortgage companies have gone bust.
“We qualify buyers at the posted mortgage rates,” says Dal Bianco. “All the banks are doing that.”
Posted rates from Canadian banks are now in the 7 per cent range for closed mortgage terms from one to 10 years, although it’s easy to get a percentage point or more off by negotiating.
The rule of thumb is that mortgage payments shouldn’t exceed 33 per cent of a family’s gross income.
That’s not to say buying a house won’t land you deep in debt, even as mortgage rates are expected to slide in the coming weeks — leaving variable rate mortgages popular because the interest rates fall with the prime rate.
The trick is to be fully aware of how far in debt you’ll be, and be comfortable that your finances can cope.
Economists at the Royal Bank of Canada recently warned Ontario will “teeter on the brink of recession” this year as growth in the economy falls below 1 per cent.
The amount a homeowner will end up paying in principal and interest on a mortgage over the years can be double the amount borrowed, says Greg Johnston, senior consultant at mortgage broker Your Mortgage Connection.
That means a $300,000 mortgage today can take $600,000 out of your pocket.
“New people coming into the market are somewhat aware of that,” Johnston notes. “You’re the one making the payments, you’ve got to be able to sleep at night.”
