Raising The Red Flags

by Darrin DeRoches January 26 - February 1, 2012

I have a client that is looking to buy a condominium in the Oakville and Mississauga area. He works in Brampton four days a week and he decided to go to his bank to get pre–approved. With interest rates at an all–time low it is a great time to get a mortgage. He goes into his bank last Friday and within an hour his bank has pre–approved him for $187,000 dollars for a mortgage at 2.99 percent on a four year term. It all sounds good so as a real estate broker I should just start showing him condos in his preferred area and be done with it.     Unfortunately I can see a bunch of red flags so instead of just jumping into showing him condos I start to make a few observations. I am aware of his income and debts and feel he should be approved for a higher mortgage than $187,000. So when I start to ask him what information the bank gave him I realize they are covering their ass–sets. They suggest to him to include his car loan into the new mortgage, sounds great as it is only about $10,000 and it will make for one easy payment. So being the devil’s advocate is to point out that the $10,000 will increase his mortgage amount but not allow him to purchase a bigger property. If he is able to spend $200,000 instead of the $187,000 he may be able to get a second bedroom in the condo. The bigger issue is not just increasing his mortgage amount but the financial decision to have the $10,000 car being added to a mortgage that will take 25 years to pay off. So it may be a great rate at 2.99 percent but the $10,000 on the car will cost near $12,000 in interest over the 25 years of amortization of the mortgage.     I then went on to explain to my client that a condo in Oakville/Mississauga will have a condo fee in the $400–500 a month range. If he was to consider talking to a mortgage broker and see if they can get him a mortgage in the $200 range without including his car and if he would consider living in a house in Hamilton, he would make more money on his real estate investment. A home will not have the $500 a month condo fee and if he took half of that towards improvements and the other half to the extra gas it may cost him to drive 20 minutes more into Hamilton, he would still be ahead of the game.      A home in Hamilton will increase in value at a greater rate than a small one bedroom condo in the GTA. Plus the thousands a year he can save in condo fees can be reinvested into the property or enjoyed for a 20 minute drive down the highway. I gave him food for thought to look down the road in five years and see what his real estate investment can be, but it is his decision and lifestyle he needs to consider. V         Darrin DeRoches is a local real estate and mortgage broker. He can be reached to answer questions, comments or stories about real estate experiences through this weekly column at mail@uniquerealty.ca.