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Why you shouldn’t take the maximum mortgage you are offered

Stress testing your mortgage by considering a potential rise in interest rates, as well as home-ownership costs, is crucial, experts say

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For prospective buyers, one glance at any real-estate listings page in cities like Toronto or Vancouver does not make for pleasant reading.

The average price of a home in the Greater Toronto Area was $863,910 last month, according to the Toronto Real Estate Board, while in Greater Vancouver, the news was even more grim, with the average price for detached houses reaching $1,830,956.

Of course, while condominiums represent a cheaper way to get onto the property ladder, they are by no means cheap, and for those thinking of starting a family, the option of living in a two-bedroom highrise condo may not be what they had envisioned.

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In that environment, the urge to spend every penny of what a bank is willing to lend may never have been greater. However, despite the temptation to use any means necessary to land that dream home, exercising some caution can pay dividends down the road.

That advice rings especially true following last October's legislative changes. In the wake of those changes, first-time buying power has been reduced by a requirement that borrowers who put down less than 20 per cent must be able to cover a mortgage at a higher interest rate than they will actually be paying.

"Definitely get something that's much more manageable than what you qualify for because there are so many other expenses that pop out of the woodwork that you never really thought of," says Adrienne Annett, a real estate agent with Right at Home Realty Inc. in Toronto.

Those expenses can range from semi-frequent payments, such as property taxes and hydro, to monthly expenses, such as Internet and condo fees. And while condo fees may seem like a sizeable expenditure, at least owners are largely covered for any major repairs that may need to be done.

For home owners, though, the cost of home-maintenance nightmares can prove crippling, so those in the know advise anyone in that situation to try and prepare for whatever is coming down the road.

"When a house catches you by surprise and needs something significant in the maintenance department, it's usually immediate and it's usually in the thousands of dollars," says Ross Taylor, founder of Ross Taylor and Associates mortgage brokers in Toronto.

"… Things are just going to come up and they should be notionally factoring in $200-$300 a month for maintenance to be determined as time goes by."

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Though people never imagine it will happen to them, home buyers can lose their properties due to foreclosure, says Ms. Annett.

While interest rates are currently low, she cautions that no one is sure about when they might increase. It's a guessing game that a lot of people who are spending to the maximum of their mortgage might not be so ready to play.

"The idea is to get rid of the mortgage, not just keep it and just hope the interest rates will stay low because heaven forbid if you have a 2.5 [per cent] interest rate for five years and when it comes time to renew it's 3.5 [per cent]. Some people will lose everything," she adds.

While she attempts to convince her clients to be clear about what they can realistically afford, she understands that everyone's idea of a dream home is different.

But for those who take on too much, she sees the need to use their home as an "ATM machine," where the mortgage is refinanced over and over again to try and consolidate debt and it never gets paid off. With that in mind, she advises clients to think a little smaller and build from there.

"You don't always have to get the best property right away," she says. "… I always suggest to people: Try to get something a little smaller; maybe get a condo at first and then sell it, get some equity and get something bigger."

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That especially applies to changing life situations. Suzanne Stephens, a real estate agent with Royal LePage Real Estate Services Ltd. in Toronto, says she fears for some who take on too much too soon.

"I know young couples who don't have a family yet and buy right to their max and I think, 'What are you going to do when you go on maternity leave? That's going to be very hard for you to manage,'" she says.

Sitting down to consider their mortgage in the context of an overall financial strategy may be the best bet for many home buyers. By not spending to the maximum allowed by the mortgage, whatever is left over can be freed up for other things, such as savings or investments, or put towards a rainy-day fund to address financial emergencies.

"Things seem to go wrong just about every year," says Mr. Taylor. "So look at what [fixing those issues] add up to and then see how much mortgage you would qualify for … If that's the maximum that you're comfortable spending, then make your mortgage determination that way."

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