The fear of ridicule from friends & neighbours forced Hank & Joan to buy a converted townhouse in a new development adjacent to their present rental accommodations . Several families decided to buy at the same time. Hank & Joan were on a limited disability pension and honestly struggled every month to make the rent payment of $625 (which included heat & light). The only other real debt was a van with handicap access and controls which cost them $325/mo.

The new purchase at $114,000 (renovated townhouse) meant they had to liquidate holdings to come up with the required 5% down payment and closing costs, totaling almost $8000. It was savings they could not afford to spend, however peer pressure won. The good news (or so they thought) was a mortgage rate of 4.75% for a three year term. Notwithstanding the rate, inclusive of property taxes and common element fees, the monthly housing costs would increase by $300. They felt that if they could survive another three years, the van would be paid, increasing the cash flow by $325/mo. They bought!

The car loan finished as scheduled, just in time to get the mortgage renewal from their bank. The rate has gone from 4.75% to 8.05%, an increase of $283/mo over their old mortgage payment. How could the rate go up that much? Where was the much needed reprieve? They started to ask questions about the rate. It turns out that the rate of interest three years ago was really 7.75% and the developer asked the bank to lower the rate to qualify more people. The bank obliged under what is termed a mortgage buydown. Basically, the developer paid the bank the difference between the two rates. So now, after the three year period, nobody is paying the bank the difference so market rates take precedence.

To make matters worse, the van has need for immediate repairs, to the tune of about $6000. They have no cash. They could borrow the extra money because of their excellent payment record, but they know they can’t afford the increase in the mortgage rate plus $193/mo for the van. They must sell the unit! After numerous phone calls to real estate agents, Hank finds out that the value on resale of his unit is less than what he paid three years ago. With paying off the mortgage, they will still owe some $4000, which they don’t have. What to do?

The immediate answer was to negotiate a better rate on the mortgage. We were able to find a lender to accept the mortgage at 7% instead of 8.05% (as offered by their bank). Then we asked the new lender to allow a buydown to 4.75% to keep the mortgage payments where they were. The cost of the buydown, as well as the van repairs were obtained from their life insurance company at 7%, amortized over 4 years (payments of $280/mo). They must struggle another three years or so until they have paid down sufficient principal to make a sale worthwhile, or hope the market in refurbished townhouses rebounds.

Hank & Joan knew three years ago they could not afford this home, and the fact they love their house does not ease the pain of trying to cut corners everywhere for the sake of owning real estate. Your financial life is yours alone to interpret, make the smart move and calculate what you can afford without the interference of your banker or your friends.