- Paying too much attention to the interest rate
Who can resist an ad promising you’ll only pay 3.34% interest over 5 years on a fixed-rate mortgage? Very few people, it seems. “A meagre interest rate doesn’t necessarily mean that a particular mortgage would be right for you,” says Angela Calla, accredited mortgage consultant at Dominion Lending Centers in Vancouver. She says such a loan likely comes with restrictions and penalties. Young couples may instead need a more flexible loan, which allows them to pay more when they have more money and pay less when, for example, one of the spouses is on maternity or paternity leave. Or lose their job.
The payments associated with a large mortgage are lower than they were 15 years ago, of course, but Calla says any strategy should aim to pay off that debt as quickly as possible, which means putting more money into the title of loan repayment than is required. This strategy will pay off when interest rates return to more normal levels. “Current interest rates are a gift, and young couples have a golden opportunity to pay off a large portion of their mortgage,” she adds.
Do they? The answer is no. Many newlyweds don’t have a comprehensive plan for paying off their mortgage, notes David Field, a financial adviser at WSC Insurance Group in Oakville, Ont.
- Not talking about your finances
Picture this: A young couple is out for a drive on a Sunday and sees a new residential development in a fashionable area. They see an open house poster and decide to take a look since they are there. Here is! They found their first dream home. Mrs Calla hears a version of this story more often than she wants. The problem is that the couples have not yet done their homework regarding their finances. “A lot of times, they don’t take the time to get pre-approved for a mortgage before they go house hunting. They don’t even know anything about each other’s credit ratings,” she said. “The financial situation of one of the two may not even allow them to buy a house, which can jeopardize their plans for the future.” - Ignore other expenses
Indeed, young couples know the number of their mortgage payments for the next 3 to 5 years. But when Mr Field asks his newlywed clients how much their property taxes, home insurance premiums and emergency fund are, he gets only vague answers. Many couples’ budgets are more focused on paying off the mortgage than they should be. Since property taxes and insurance premiums can increase each year, these couples will have cash flow problems.
Lesson? First, make sure you have enough savings for emergencies and retirement—plan coverage within your budget for you and your family, including home and mortgage insurance. Then see how the rest of the available money can be used to pay for a mortgage, utilities and property taxes. “If your cash flow is low and something happens, like losing a job or having a baby, then you will be in serious financial trouble,” Field warns. “Any new marriage has its ups and downs, and adding financial issues can have undesirable consequences.”
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