# Hold off Buying Up?



## gixxer13 (Feb 3, 2011)

The title is a portion of my concerns. 

I too like wishful_aspirations have been browsing through the threads and have learned a lot. I'll try to keep this opening thread comment to the point. 

Right now, wife, baby and I looking in the Spring to move out of 1 bed condo and into 3 bed house. This has been the 'plan' since preg test showed + in May 2010. Current condo worth approx $325K, we have $100K of equity in it. We're looking at $500K houses as we're approved for $575K.

Wife and her mom happen to have bought new 2 bed condo a few years ago for $240K which will be ready in June 2011. This was strictly for investment purposes to be rented out. We're having thoughts of now moving into that new condo in June, and rent out our current 1 bed condo. Theory behind this is partially the real estate doom and gloom to come. I don't think it'll be as bad as Garth says it'll be. But if we buy that house in 2 to 3 years as opposed to this Spring, we will be better off? Also, becuase wife owns half of new condo, and we rent current condo, what are capital gains ramifications?

Sorry this went on a little long. I would sincerely appreciate advice. 

Thank you.


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## Rico (Jan 27, 2011)

It sounds like moving into the 2 bedroom condo will be way cheaper but it depends on your space/location needs.

As for capital gains - when you turn a property into a rental, there is a "change of use" and CRA considers that you've sold the property (basically to yourself) and that is the fair market value. In the future, once you sell the place, the sale price less that FMV price (when it became a rental) is the number used for capital gains. 

Example: You bought the 1 bdrm condo for 200000 (I made that up). It's FMV is 325000 when converted to a rental. You pay nothing for capital gains on the 125000. However, 10 years later say it's worth 400000. You would pay capital gains on 75000 (400000-325000).

If you move into the 2 bdrm condo - I believe something similar takes place. It will now become your principal residence and any increase in value since purchase would be a gain for your wife and her mom since it was bought for investment and is changing use to personal. Would you be buying out the mom's share (i.e., removing her from title and financial obligations for it)?


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## NotMe (Jan 10, 2011)

gixxer13 said:


> I don't think it'll be as bad as Garth says it'll be.
> Thank you.


Garth has, to my knowledge, only really ever said a 15% decline in GTA and then a slow slide over the next few years to about 25% decline I think he said in one of his posting (between the unnecessary sarcasm and defensiveness they start to blend into one). That may be him waffling a bit but he's not come out and said expect a 50% decline unless someone can point to the post.

As to your question, yes you would be better off if housing declines. A 10% decline on your condo will cost you money, but a 10% decline on a more expensive house will benefit you more than it will cost you. But that assumes the decline is worth the pain. For me personally, I think it comes into a lifestyle situation. I have found house living superior to condo living. One option is to sell the condo you're in now and just rent, but I get that you'd rather keep the money in the family.... 

I was in some ways lucky when I had your situation (wife became pregnant in 2006) because our one-room loft (not one bedroom, one room) wasn't going to be suitable ever and I needed the equity from the sale.


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## osc (Oct 17, 2009)

If you are approved for $575k you shouldn't get a mortgage more than $200k. Sell your current condo, sell the investment condo, take $200k mortgage and buy whatever you can with what you have. Waiting a couple years may be an option, but you'll bet for a significant correction. I wouldn't wait if what I could afford would cover my needs.


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## gixxer13 (Feb 3, 2011)

As far as living quarters and location goes, it's all fine. If we go this 1 bed condo to 2 bed condo route, it would be for only 2 to 3 years as baby would probably be expecting a sibling by then. Therfore house is a must. Notme, you are right, just renting isn't on the table. Keeping the money in the family is right. Rico, thanks for the explanation. As far as Mom on the title, her name would stay.


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## NotMe (Jan 10, 2011)

osc said:


> If you are approved for $575k you shouldn't get a mortgage more than $200k. Sell your current condo, sell the investment condo, take $200k mortgage and buy whatever you can with what you have. Waiting a couple years may be an option, but you'll bet for a significant correction. I wouldn't wait if what I could afford would cover my needs.


So take $100,000 equity + $200,000 equity and whatever other downpyament is (note that the investment condo is not only his wife's, but both wife's and her mother's, and unbuilt - doable but also may mean that mother in law moves in with them, not everyone's taste). 

I guess they could do that but I wonder if they would end up pretty much where they started. If 1-bedroom condos are $325K, it seems unlikely that they'll be able to get a 3-bedroom house without some sacrifice (ie long commute, etc) I think a $200K mortgage is somewhat unlikely, though I get the sentiment. 

Maybe the original poster could disclose their family income to give the numbers some context. Bill Gates could take out a $500,000 mortgage and it would be fine. A guy making $20,000 a year shouldn't have a $100,000 mortgage.


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## sprocket1200 (Aug 21, 2009)

NotMe said:


> So take $100,000 equity + $200,000 equity and whatever other downpyament is (note that the investment condo is not only his wife's, but both wife's and her mother's, and unbuilt - doable but also may mean that mother in law moves in with them, not everyone's taste).
> 
> I guess they could do that but I wonder if they would end up pretty much where they started. If 1-bedroom condos are $325K, it seems unlikely that they'll be able to get a 3-bedroom house without some sacrifice (ie long commute, etc) I think a $200K mortgage is somewhat unlikely, though I get the sentiment.
> 
> Maybe the original poster could disclose their family income to give the numbers some context. Bill Gates could take out a $500,000 mortgage and it would be fine. A guy making $20,000 a year shouldn't have a $100,000 mortgage.


i disagree. this guy would be paying less than rent...


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## the-royal-mail (Dec 11, 2009)

I don't see why ANYONE needs to spend $500K on a house, kids or not. What's wrong with a $200-250K house?

Remember, the bank approval amount is a maximum. No one says you MUST spend that much.


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## I'm Howard (Oct 13, 2010)

royal mail, not sure where you live but it sure as hell ain't TO, $350,000 is a starter one bedroom condo, $500,000 is an entry level House.


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## kcowan (Jul 1, 2010)

I don't know if this has been understood, but, by living in the new condo, any appreciation from preconstruction is partially protected. Your wife's half of the capital gain is considered principal residence. Her mom's half will not.

And mortgage rules now treat an acquisition for principal residence more liberally than speculative acquisitions. So this "might" make the acquisition of new financing easier.


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## Plugging Along (Jan 3, 2011)

the-royal-mail said:


> I don't see why ANYONE needs to spend $500K on a house, kids or not. What's wrong with a $200-250K house?
> 
> Remember, the bank approval amount is a maximum. No one says you MUST spend that much.


I think blanket statement like this just don't apply. Where I live, you cannot find a 200-250K house, even grow op houses are more than this.

In terms of need, not everything in life comes to need. There is nothing wrong with buying some of the wants, providing that it is affordable, and you're balancing your other goals. Life isn't about seeing who has the highest amount saved. 

Don't get me wrong, I do save well, but I also spend just as well. I spend the least on things that do not bring me enjoyment, or improve my lifestyle, and lots on the things that I do feel I will enjoy more. My one exception is that I perfer used vehicles that meet my functional needs, where is my spouse wants the luxery, status vehicles, brand new. Our comprimise is we buy them from the US. We pay the least amount possible, and it keeps the family happy, though I do think it's a waste of money. The key is, we can afford to do so.


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## osc (Oct 17, 2009)

NotMe said:


> Maybe the original poster could disclose their family income to give the numbers some context. Bill Gates could take out a $500,000 mortgage and it would be fine. A guy making $20,000 a year shouldn't have a $100,000 mortgage.


A bank would approve someone with as little as $125k/year for a $575k mortgage at current rates. I wouldn't take a $575k mortgage with an income lower than $250k.


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## kubatron (Jan 17, 2011)

Really? $250K for a $500K loan? Why??

(P.S. few people make this kind of money, but your logic at 1:2 income to loan, most people should be making $250K-$500K/year)


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## Shayne (Apr 3, 2009)

osc said:


> A bank would approve someone with as little as $125k/year for a $575k mortgage at current rates. I wouldn't take a $575k mortgage with an income lower than $250k.


More like $900K with that income. 

Really kind of sick when you think about it.


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## osc (Oct 17, 2009)

kubatron said:


> Really? $250K for a $500K loan? Why??
> 
> (P.S. few people make this kind of money, but your logic at 1:2 income to loan, most people should be making $250K-$500K/year)


I was talking about a $575k loan for a $250k income. For lower incomes, below $150k, a 1:2 ratio is better. 
Why? Because you would be comfortable paying it even if the rates go up. Because you could pay it off in 10 years and actually become an owner (instead of a virtual renter from a bank). Because after 10 years you could focus on investments and maybe become financially independent. Because if everyone would do that, house prices would be substantially lower and fewer people would be controlled by their creditors, the banks.


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## marina628 (Dec 14, 2010)

gixxer13 said:


> The title is a portion of my concerns.
> 
> I too like wishful_aspirations have been browsing through the threads and have learned a lot. I'll try to keep this opening thread comment to the point.
> 
> ...


My gut feeling is you are a young family not experienced in the rental market so You should consider selling the 1 bedroom condo and cash out now ,move to the two bedroom .You can invest your $100,000 and get a good return.
Renting is not for everyone and you could get tenant from hell.


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## houska (Feb 6, 2010)

marina628 said:


> My gut feeling is you are a young family not experienced in the rental market so You should consider selling the 1 bedroom condo and cash out now ,move to the two bedroom .You can invest your $100,000 and get a good return.
> Renting is not for everyone and you could get tenant from hell.


I would second that, but for slightly different reasons. By coming here and asking the question the way you are, it is clear you're a bit nervous about being overexposed to the real estate market. Nothing wrong with that; we each need to be comfortable with our investment decisions. Plus, rentals are a hassle, whether it's the one bedroom or the 2 bedroom. Finally, real estate transactions have significant transaction costs (especially if you use a realtor). So I'd suggest moving into the 2 bedroom, which for now will be adequate, and selling the 1 BR. By not buying the house now, you'll save on the transaction costs (though you will have some by selling the 1BR), and minimize your concentrated exposure to a housing market you're clearly nervous of at a time when you'll have enough stress and worry (and hopefully joy!) in your life. A few years from now, you can revisit whether you want and need to move to a 3 BR house then. And there's a lot of comfort from not financially overextending yourself, so why saddle yourself with a bigger mortgage than you need?


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## sprocket1200 (Aug 21, 2009)

kubatron said:


> Really? $250K for a $500K loan? Why??
> 
> (P.S. few people make this kind of money, but your logic at 1:2 income to loan, most people should be making $250K-$500K/year)


haha, this is exactly the problem right now. $250-500K is what most people who are buying homes of those values should be making.

people aren't making that kind of money.....
values are over inflated.....
people can't rely on the soft landing of a 40 yr (or 35 yr) mortgage when rates go up...
get your cash ready, the opportunities will be endless.....


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## marina628 (Dec 14, 2010)

When i bought my first home we made $45,000 a year and had a $160,000 mortgage .Now we earn close to $200,000 a year and on $980,000 in real estate I owe $439,000 .I think this generation is not phased by these big mortgages because all their friends and family have the big mortgages as well.
I think new buyers and trade up buyers should not buy more than they can afford on a 25 year amortization .


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## sprocket1200 (Aug 21, 2009)

marina628 said:


> When i bought my first home we made $45,000 a year and had a $160,000 mortgage .Now we earn close to $200,000 a year and on $980,000 in real estate I owe $439,000 .I think this generation is not phased by these big mortgages because all their friends and family have the big mortgages as well.
> I think new buyers and trade up buyers should not buy more than they can afford on a 25 year amortization .


I agree, and I love the sheep mentality, it creates so much opportunity for the wolves...

why anyone would take more than 10 years to pay off their mortgage baffles me.


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## gixxer13 (Feb 3, 2011)

houska said:


> I would second that, but for slightly different reasons. By coming here and asking the question the way you are, it is clear you're a bit nervous about being overexposed to the real estate market. Nothing wrong with that; we each need to be comfortable with our investment decisions. Plus, rentals are a hassle, whether it's the one bedroom or the 2 bedroom. Finally, real estate transactions have significant transaction costs (especially if you use a realtor). So I'd suggest moving into the 2 bedroom, which for now will be adequate, and selling the 1 BR. By not buying the house now, you'll save on the transaction costs (though you will have some by selling the 1BR), and minimize your concentrated exposure to a housing market you're clearly nervous of at a time when you'll have enough stress and worry (and hopefully joy!) in your life. A few years from now, you can revisit whether you want and need to move to a 3 BR house then. And there's a lot of comfort from not financially overextending yourself, so why saddle yourself with a bigger mortgage than you need?


You are correct about me being nervous about being exposed to the real estate market. My biggest concern is we buy a house now, then in 2 to 3 years, that same house (or similar to it) sells for 10% less. As far as renting our property, her family has vast experience in that department so that's not too much of a concern for us. Of course we realize there are renters from hell. 

Our combined income is $190K with no debt except a car payment. We figure getting a house for the full $575K is nuts, so getting a $500K house wouldn't be too bad. Starting to reconsider that.

Really appreciate the advice from all!


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## NotMe (Jan 10, 2011)

Why is a 10% decline in similar houses in 2 or 3 years your biggest concern?

Unless you're planning on selling it, that's only a loss on paper. 

But for me personally, I couldn't care less if my house dropped in value 10%. Even 30% wouldn't concern me too much. We bought in 2007 and there hasn't been one house for sale on our street since then, so I know that it's still a desireable place to live and will likely be so in the future (as no one is leaving). We plan on being here for at least 10 years. It's very likely that a 10% decline in 2-3 years is entirely possible, but since I plan on being here a while I'm not too woriried. There's also more to life than numbers.

As for the comments like "why anyone would have a mortgage of greater than $200,000" or "take 11 years to pay a mortgage" etc -- these get into questions of lifestyle. For me, for instance, I live in the city of Toronto and wonder "why anyone would ever want to live in Stouffville/Pickering/Barrie" but they wonder why I paid $450K for our house which is fair enough. It's about choices.


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## andrewf (Mar 1, 2010)

NotMe said:


> Why is a 10% decline in similar houses in 2 or 3 years your biggest concern?
> 
> Unless you're planning on selling it, that's only a loss on paper.
> 
> ...


It only matters if it means you have insufficient equity in your home come mortgage renegotiation time.


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## sprocket1200 (Aug 21, 2009)

NotMe said:


> Why is a 10% decline in similar houses in 2 or 3 years your biggest concern?
> 
> Unless you're planning on selling it, that's only a loss on paper.
> 
> ...


I agree with you. in fact, i don't care how low my house goes. it is a place to live, NOT an investment. the lower is goes the more sense it makes to own it. the higher it goes, the more sense it makes to sell and rent. rents are not increasing anywhere near the rate of houses themselves.
it IS choice, and don't get us wrong, no explanation is required for your choices. i love that people handcuff themselves for various reason. i just wish the bleeding hearts and governments would stop saving them from themselves...


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## NotMe (Jan 10, 2011)

andrewf said:


> It only matters if it means you have insufficient equity in your home come mortgage renegotiation time.


Is that actually true that the banks look at comparable resales in your neighbourhood before reissuing your mortgage renewal? 

I've heard alot of anecdotes about this (especially on garth's site, but that's full of anecdotal evidence) but can anyone cite an actual bank rule that says they do this? I have a feeling that this may exaggerate the bank's processing abilities.


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## andrewf (Mar 1, 2010)

I wouldn't want to invest in a bank that didn't!


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## sprocket1200 (Aug 21, 2009)

NotMe said:


> Is that actually true that the banks look at comparable resales in your neighbourhood before reissuing your mortgage renewal?
> 
> I've heard alot of anecdotes about this (especially on garth's site, but that's full of anecdotal evidence) but can anyone cite an actual bank rule that says they do this? I have a feeling that this may exaggerate the bank's processing abilities.


oh yeah, they have a massive data base. if you ask for too much they pull out an appraisal and have that done.


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## NotMe (Jan 10, 2011)

But for a straight renewal, do that do that everytime? It doesn't even make business sense if the original loan was CHMC approved, because their risk is pretty low - they still foreclose on the house, sell the house at market rate, and get the difference refunded. 

Obviously if you're asking for an increase in the loan they are probably stricter, but for a straight renewal when you have a history of making payments on time? Really? Ok Just surprised.


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## andrewf (Mar 1, 2010)

They probably also look at market conditions. So if we're in the midst of a correction they'd likely be a lot more careful about renewals having enough equity.


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