How to avoid the financial misery that comes with too much mortgage

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When lenders size you up for a mortgage, they analyze your ratio of debt to income, down payment, credit and so on, and most people get approved.

But not everyone gets approved for the mortgage they should get.

In many cases, by stretching their budget, folks land heftier mortgages than their wallets can bear. Burdensome mortgages not only make them house-poor but research shows the stress they cause might just shave years off a borrower’s life.

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So, if you’re not keen on your mortgage hustling you to an early grave, consider these tips to trim it down to size.

But first, some stats

One-third (33 per cent) of mortgagors surveyed by Mortgage Professionals Canada (MPC) say they regret taking on the size of mortgage they did. On a percentage basis, that’s 27 per cent more than 12 months before. And, for those renewing in the next year, the share with regret is 10 percentage points higher.

It does make one ponder why folks willingly dive into such mortgage misery.

One factor is needlessly exorbitant home prices. Many feel they don’t have a choice but to pay up. That reality is driven mainly by too much population growth and not enough home building. Credit for the population boom goes to the federal government, while the lack of building can be blamed on all levels of government.

The second reason is homebuyer expectations. People have blind faith that prices will keep climbing. In fact, 72 per cent of Canadians think prices will go up in the next 12 months, finds that MPC survey. And most, (58 per cent) say their purchase was at least partially motivated by their expectation of home appreciation.

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Moreover, with rents at all-time highs, many homebuyers feel they must buy.

Yet, with a slowing economy, more homebuilding, pressure on politicians to rein in immigration, near-record-high unaffordability, and just about the steepest inflation-adjusted home price run-up on Earth, it would be foolish to expect the same 5.7 per cent long-term annual appreciation rate Canada has experienced since 1981.

Canadians will still likely make above-inflation tax-free returns on their primary residence long-term, but more than ever, it makes sense to diversify wealth into other investments.

Right-sizing your mortgage risk

You can’t rely on lenders to tell you your mortgage is too hefty.

And stretching your home purchase budget to the max, as CMHC says nearly half of buyers do, is a fast track to that grim reaper stress we were talking about.

In short, the more you push the limits of your home-buying budget, the more you risk:

• Having little or no discretionary income for boring stuff like going out to eat, vacations, Christmas and birthday presents, hobbies, home maintenance, retirement investing and emergencies
• Negative equity, where your home is worth less than your mortgage — a legit risk for those putting down just five per cent
• Difficulty selling for a meaningful profit, or even what you paid, if you need to offload during a market dip.
• Significant payment hikes at renewal, or on a floating-rate mortgage, if rates turn back up.

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This last point isn’t trivial chatter. Despite the likelihood of falling rates well into next year, economists far and wide, and the Bank of Canada, both warn that interest rates could settle higher than in the past due to structural inflation challenges.

Interesting tidbit: MPC says variable-rate holders are nearly six times more likely as those with fixed-rate mortgages to regret becoming homeowners at all. Albeit, those numbers will normalize as rates drop.

Two tactics

To dodge these financial migraines, buyers should embrace two simple strategies, among others:

First, keep at least a five per cent buffer in your budget post all living expenses, including housing. That’s just the bare minimum because a $5,000 safety net with a $100,000 salary can vanish with a single unexpected bill, or worse — a layoff, separation or illness.

Second, maintain adequate liquidity after buying a home. The old wisdom said to save three months of living expenses, but with looming housing and inflation uncertainties, bump that to six months.

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And if you have a long runway to retirement, are risk-tolerant, prudent with your money and have no upcoming cash needs, consider placing your backup funds in somewhat higher earning assets that you can turn into cash on short notice. Then consider a line of credit as a backup to these savings. That way you can slightly increase investment risk to earn higher returns, and have a secondary liquidity source if your investments temporarily drop, right when you need them. And avoid using that backup credit line for anything that doesn’t make or save you money.

In essence, plan for the worst, hope for the best, and don’t let your lender set your borrowing bar.

Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.

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The rates displayed below are updated by the end of each day and are sourced from the Canadian Mortgage Rate Survey produced by MortgageLogic.news. Postmedia and Imaginative.Online Inc., parent of MortgageLogic.news, are compensated by certain mortgage providers when you click on their links in the charts.