Are you and your new or soon-to-be spouse looking for your first home together? Here are the top 3 mistakes newlyweds make in their real estate purchases – and what you can do to avoid them:
1. Focusing on the interest rate
Who can resist an ad that promises you’ll only pay 2.49% over 5 years for a fixed-rate mortgage? Very few, it seems. But the lowest interest rate doesn’t necessarily mean the best mortgage for your situation, says Angela Calla, an accredited mortgage professional with Dominion Lending Centres in Vancouver. She says such a mortgage likely has restrictions and penalties. Younger couples may need a more flexible mortgage -- one that allows them to pay more when they have more and less when a spouse is on maternity leave or facing job loss, for instance.
While the payments required to carry a hefty mortgage are lower than, say, 15 years ago, Calla says the strategy should be to repay the debt as quickly as possible. That means paying more money towards the mortgage than you technically need to. This strategy will pay off greatly when interest rates return to more normal levels. “Today’s interest rates are a gift and young couples have a great opportunity to pay off a significant part of their mortgage,” she adds.
But are they doing this? By and large, the answer is no. Many newlyweds tend to lack an overall plan for paying off the mortgage, notes David Field, a financial advisor with WSC Insurance Group in Oakville, Ont.
2. Not talking about their finances
Picture it: A young couple goes out for a Sunday drive and spots a new housing development in a trendy area. They see the open house signs and decide to take a quick look, since they’re in the neighbourhood anyway. Presto! They’ve found their dream starter home. Calla hears a version of this scenario more often than she’d like. The problem is, couples haven’t run the numbers ahead of time. “A lot of times, they don’t take the time to get preapproved for a mortgage before looking. They don’t even understand about each other’s credit situation,” she says. “One of them may not be in a financial position to even purchase a home. That can put a damper on their plans moving forward.”
3. Not factoring in other expenses
Young couples definitely know the amounts of their mortgage payments for the next 3 to 5 years. But when Field asks his newlywed clients about their property taxes, home insurance policy premiums and how much they are setting aside for emergencies, details get scarce. Many couples’ budgets are more mortgage-heavy than they should be. But taxes and insurance can rise significantly each year, and that translates into a lack of cash flow.
The lesson here? Make sure you are saving properly for retirement and emergencies. Build protection for yourself and your family into your budget with adequate homeowner’s insurance and mortgage protection insurance. Then see how comfortably your mortgage, utilities and property taxes fit into what’s left over. “If your cash flow is too tight, if something happens like losing your job or having a new baby, you are really constrained,” says Field. “A new marriage has its ups and downs as it is; adding money problems to the mix really affects the marriage.”