Buying property with your head, not your heart

For the last few months, I have felt a bit of a return to normal in the mortgage world.

Fixed rates have been trending down and we’ve seen some great rate specials available. More importantly, it has felt like a more balanced market where people are taking a bit more time to do their due diligence and make more educated and thoughtful (as opposed to emotional or panicked) decisions about their home purchases.

The last few weeks I’ve felt a subtle shift. The housing market is starting to heat up a little. I’ve seen a few situations where there are multiple competing offers. Inventory still seems a little low which is likely fuelling this.

I have been dealing with two families who have taken completely different approaches.

The first family is looking to “right-size” their home and move from a condo to a single family home. They already have two children and a third on the way. They want more space and a better neighbourhood to raise their children in.

They wrote an offer on a lovely home before they looked into their mortgage options. They came to me with an accepted offer and are madly in love with the home they wrote the offer on. They are willing to move heaven and earth to make it happen. The challenge is they have not had an offer on their condo yet.

They both make great incomes and have investments that will cover the necessary down payment. The trick is if they have haven’t sold and have to move forward with their purchase, they will have to use a private lender to make it happen because their ratios are too high carrying both properties.

Two years ago I might not have been so concerned but with the market being a bit slower there is significant risk that their condo might not sell in the timeframe they need it to.

If that happens, and they choose to go the private lender route, they are looking at roughly $20,000 in fees and closing costs and an interest rate of 10%. Monthly payments would be $4,400.

They will not be able to rent out their condo because of restrictions in their strata. With strata, property taxes and their mortgage payment, they are looking at about $2,600 per month for that property.

If they end up having to carry both of the mortgages for more than a few months, they are going to burn through their savings very quickly. They may end up having to drop the price of the condo significantly, which means they might take a loss on the condo as their mortgage balance is close to the break even mark after realtor fees.

They are determined to move forward regardless and quite honestly it concerns me.

Another family I am working with has taken a different view.

Similar situation and they can more than cover both mortgages if they have to. They have done a very thoughtful analysis of their finances and lifestyle and have taken the approach that it will all come together if it is meant to, and that if their current home doesn’t sell, they will not put themselves in jeopardy to buy that particular home. This approach makes me much more comfortable.

What is the danger in the first situation? If for some reason they do move forward and their condo doesn’t sell for several months, I don’t think they will be able to afford the payments on both homes. If they fall behind they will have no buffer left and could potentially end up in foreclosure.

Maybe it doesn’t get that drastic, but the stress of carrying both properties will be overwhelming.

Before you write an offer on a home, I cannot stress how important it is to connect with a mortgage professional to get your financial ducks in a row. Knowing what you qualify for, and if you qualify, as well as the costs of making a move will help set you up for success.

There is often a way to arrange temporary financing to cover both homes, but the big question is does it make sense to move forward if you are madly in love with a home?

Only you can make that decision.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.