Kamal and Raman Khangura have a new home in Abbotsford — and the mortgage to go with it.
“Young homeowners Raman and Kamalpreet Khangura say disciplined saving is the best way to banish financial fear.
The Abbotsford couple have so far kept their heads above the debt that threatens to drown many young British Columbians. The Khanguras keep an iron grip on their spending and salt away every dollar they can.
In February, the couple — without help from family — bought a $527,000-home in Abbotsford, paying $27,000 down. They have a $2,000-a-month mortgage payment.
That’s a lot of debt. And Raman, 26, admits to having had some passing worries before buying the house.
He reassured himself by going over the details of the financial plan he and Kamalpreet, 27, had prepared.
“I was thinking before we bought that it might be difficult, it might be a big challenge but when we got the home we found things were okay,” he says.
“We’re careful with our money.”
The Khanguras have no other debts and are determined to keep it that way. Credit cards are paid off each month. Their line of credit will only be tapped in the direst of emergencies.
The $1,000 a month they get in rent from a basement tenant is tucked into RRSPs. Mortgage payments come strictly out of their salaries.
Kamalpreet works as a certified dental assistant. To boost their income, Raman works two jobs — a full-time position managing a trucking repair company and a part-time bookkeeping job.”
- article and image from ‘Young British Columbians struggle the hardest with debt’, Paul Luke, The Province, 29 Oct 2011
20-somethings. 2011. $27K down, $500K mortgage. “Careful with money”. (eyeroll)
Repeat: 20-somethings; modest income; $527K purchase.
This is not “care”, this is not prudence, this is gambling.
For people who “salt away every dollar”, it’s going to be torture for them to watch a torrent of downward prices leech away all of their savings and then some; perhaps up to five times their savings. – vreaa
(BTW, what are the likely mortgage variables that get you $500K for $2K per month? Are they on variable rate?)
They aren’t speculators! Look at them. I don’t see any devil horns.
[Perhaps not... but there is something a tad diabolical about those grins... - ed.]
Simply idiotic grins.
minus the $1000 from the suite per month their mortgage is less than the rent on your basement suite vreaa.
By the time these 20-somethings reach your age they’ll have their home paid off and it’ll be worth substantially more money than they paid.
[Paid off? In two years? I think not! -ed.]
[We'll follow their fortune with you, here, in coming years. -ed2.]
Just in case you missed it…
5 lessons from the housing-bubble bust
http://realestate.msn.com/article.aspx?cp-documentid=23468447
[Good stuff, all true; coming soon, to a town near you. - ed.]
Lesson No. 2: You can’t time the market. When home prices were skyrocketing, many people bought homes they could barely afford — or couldn’t afford — thinking they’d ride the wave of rising equity since the market was on the upswing. Likewise, today, many potential homebuyers are sitting on the sidelines waiting for the market to reach its ultimate low.
“You will never sell at the all-time high and you’ll never buy at the all-time low by planning it,” says Tim Burrell, a real-estate agent for Re/Max United in Raleigh, N.C. “The market will time you. You will sell, and on occasion you may happen to hit the all-time high or happen to hit the all-time low, but to study it and plan it and figure out and actually do it — it doesn’t happen.”
Instead, take a long-term approach to real estate and look for a home that enhances your life and will increase in value over time.
blammo ->
Timing is actually crucial. But ‘timing the market’ is not the same as picking a top or a bottom. And the article blurs that distinction.
Granted, nobody picks the top or the bottom, it’s impossible.
But it is possible to buy when things are undervalued, and sell when things are overvalued. That’s all you have to do; you only have to get this timing vaguely right to be a successful investor/buyer. In fact, it is something that is very, very difficult for most people to do. The vast majority of people still want to buy high and sell low. That’s the natural instinct.
And when they say “look for a home that enhances your life and will increase in value over time” they must realize, now, that the market entry point is crucial… Those buying in the last years of the US bubble will have to wait 20 years or more before the home has “increased in value”.
Of course, their advice for US buyers is now of far lower risk. They likely still have another ‘step down’ to go; we haven’t even started yet.
All I need is an IP.
Tempting, thanks, but, no.
We have standards.
@vreaa: oh come on – you could’ve at least said you’d CONSIDER it.
Temptation involves a certain degree of consideration.
boooooooooooooo
…and VREAA is still waiting for a 60% crash.
[Yes, to confirm: still waiting, for that crash. Correct. You are getting the hang of this. Read, learn. - vreaa]
their tenant is getting ripped off. $1,000 a month in Abbotsford? Only place more expensive is actual DT!
I can’t figure out how they are getting this $2,000/month mortgage payment. I punched numbers in to the mortgage calculator at canadamortgage.com, and the only way I can get a number close to $2,000/month is by putting in a 2.4% interest rate on a 30-year term:
% Down Payment 5.12 %
Interest Rate: 2.4%
Mortgage TERM : 5 Yr
Down Payment $ 27,000
First Mortgage Amount $ 500,000
Insurance Fee ( 3.25 % of mortgage ) $ 16,250
Total Mortgage Amount $ 516,250
Monthly Mortgage Payment $ 2,010
Monthly Property Taxes $ 0
Monthly Condo Fees $ 0
Monthly Heating Costs $ 0
TOTAL Monthly Payment $ 2,010
Household Income Required $ 167,007
Oh, what’s that? The income required to obtain this mortgage is $167,007/year. How are these folks earning that much money, exactly?
In any case, assuming the numbers in the article are correct, here are a few problems facing this couple as they scrimp and save their way into the future:
– If after their 3 or 5 year term, interest rates are instead 4%, they’ll need to find an additional $450/month. A 4% interest rate is still low by historical standards.
– What if prices fall 10%? They’ll be underwater to the tune of $50K when they renew. No bank I’m familiar with is going to give you a $527K mortgage on a $475K house. Their only options at that point will be bankruptcy or dipping into that sacred line of credit to the tune of $50K. And this is for a 10% fall… What about 20% or 30%?
We’re not talking about impossible futures here. An adjustment of interest rates by 2% is well within the realm of possibility within the next three to five years. And a fall in prices — even if it’s temporary — of 10% is completely plausible.
These guys are nearly guaranteed to be going bankrupt in the next five years.
Thanks for doing the math. Bizarre, eh?
We agree, their position is precarious.
I don’t think the banks you’re familiar with are too thrilled about HELOC above 100% LTV either. They prefer extend-and-pretend.
Yea, this is not something I would be comfortable with either. In their defense, they are putting $1K/mos into RRSPs which I think is the right move (if they max out their TFSAs first). When rates go up, this money will no doubt go towards their higher mortgage payments.
Hope they aren’t planning on having kids.
RSP is off limits in event of a bankruptcy (for money put in more than 1 year prior) while TSFA is not. So putting the money into RSP is actually a good move because they wouldn’t lose it like they can with TSFA or other saving accounts in case of bankruptcy.
How do you get $165K+ income on 2K/month mortgage? DSR gives me something closer to $100K. Nonetheless, it looks a bit “off” to me as well.
What is up with canadamortgage.com? For this mortgage it shows a required household income of $167,000. If you do $700k with $200k down the required household income drops to $73,000! Even though $500k is being borrowed in both cases! I realize the first case is high ratio, but isn’t that what the CHMC insurance is for? As long as the mortgage is insured or a conventional ratio, don’t you just need the income to reasonably make the current payments?
Could be CMHC is crimping behind the scenes — you can get “high ratio” at 5% but not with high DSR. Who knows… as I mentioned if this family is underwritten by someone else, it could be that CMHC will lend them the money because the guarantee raises their effective incomes. They aren’t really getting “help” from family, then, because they’ll “never” need to use that guarantee. It’s just a formality to get past those annoying rules.
Just a guess.
Wow! They bought a house with 5% down, have $500,000 in debt and they did it all without the help from their family! What an amazing achievement!
A position that we have all been taught is worth striving for.
(BTW, what are the likely mortgage variables that get you $500K for $2K per month? Are they on variable rate?)
30 years amortization at 2.3%, not counting taxes, heat and maintenance. Household income required is $170,000/yr.
So, yes, most likely a variable rate and some creative documentation. Banks don’t seem to have very high standards (But subprime does NOT exist in Canada, right?). Few years ago, banks at least required a 10% downpayment for the lowest rates…
And who rents a basement in Abbotsford for $1000?
Perhaps we should ask Paul Luke at The Province to follow up with the Khanguras, and clarify how they managed to qualify for that mortgage. And with which broker.
I have friends who bought a condo for $520k with 10% down and are also paying ~ $2,000/month + around $600 in condo fees and taxes. They have a variable rate mortgage. They family income is around $100k, but was lower when they got the mortgage and will soon be lower again for family reasons.
I guess it’s not that uncommon.
If this family has underwriters (say parents or such), banks will take that guarantee as an indemnification and qualify them at prime. If their income is say $90K with 3 jobs and they have mortgage helper they are under the DSR cap. This is nothing shifty at all, but is in effect a subpriime loan.
I wouldn’t worry too much about which bank, they all have dirty secrets on their balance sheets, and these secrets are Teflon — they “slide” without much friction into someone else’s bag if TSHTF.
“If this family has underwriters” then the author shouldn’t have said that they purchased “without help from family”.
They said “without help from family”.
I think the bank gave them the 500k mortgage because of the $1,000 basement suite Their $2,000 payment covers about $335,000 of mortgage, the rest of it $165,000 is covered by the rental income.
Under the current mortgage qualification rules, the $1,000 rent cannot be applied directly towards the mortgage payment, but rather is added to total qualifying income.
And, under the same rules, they are supposed to qualify at 5 (or is it 3?) year fixed rates, even if choosing a variable rate mortgage.
That is, if anybody is still following any rules.
Need to qualify at 5 year rate and basement suites are add-to-income. If they have income of $100K including suite, at 40% GDSR gives $40K/year for carrying costs. That qualifies them for about $3300/month. What am I missing? I think banks will lend this much to this family under current MI rules. Never mind how stable their jobs are, or how they’ll do if one needs to go on parental leave.
The duration risk is huge.
This was my thought. That the actual mortgage is closer to $3k/mo. But they are subtracting the rental income and telling the reporter that THEIR mortgage payment is $2k/mo.
This is a 5% down payment mortgage – it has to be CMHC -insured.
Anyone else getting really, really tired of hearing stories about people who bought real estate and, when we run the numbers, it is obvious that they will run into trouble, someday, one day, but we don’t know when? Sad thing is, I’ve been passing along these stories for years, cautioning clients not to take on overwhelming debt at low rates, with every passing day I look more like the boy who cried wolf. Is there any hope for those of us who have saved up significant down payments and have a nice financial cushion? My hope is fading with every passing day….though Carney warns us that rates are going to go up “eventually”, the economy still looks like it’s in the gutter, so how could he ever raise rates? Ahhh….I give up on sensible homeownership! Guess it’s not the end of the world, I’ll just plan on renting, forever.
Lordy! pricedoutfornow capitulating and becoming pricedoutforever?
Technically there’s only 27k to lose here, so it’s a nicely hedged bet so long as you don’t mind a little default if needed. They have no other debts…how about other assets? If not you see what I mean. The only potential buyers in a tight spot here are vreaa, most posters, and myself that have some (but not so much that it doesn’t matter) wealth on the line. Their equity is already gone, by the way: 15k realtor fee (if the value holds) + 13k (property transfer tax). Or is 27k = 40k savings – 13k tax? Damn, they might be already down 32.5%! Maybe we should be more kind, they might have almost saved up 10% of the price, well almost 8%.
Back to the positive, if things do get nasty in say 27 months they will have return-of-capitaled the entire 27k from the suite! The only risk will be the $5.99/month of principal repayments.
If you’re not sure if you have a lot to lose check your home equity + savings compared to your RE exposure. If you have already HELOCed it all, you’re fine. If you just bought with nothing down, don’t worry. If buying your place(s) was the “best decision” you’ve ever made, then the time to panic is now.
By the way, $2500/month (the upstairs is nicer than the basement) is 5.7% (tax free) gross cap rate. As a real rate this is actually rather good. Abbotsford is actually rather cheap compared to metro. It’s all so confusing. Maybe the rent figures are a little high…
Technically there’s only 27k to lose here, so it’s a nicely hedged bet so long as you don’t mind a little default if needed.
Not completely true. If the price of their home goes down and they walk away, they will be liable for the difference between what they owe and the foreclosure sale price.
They could file for bankruptcy and I am not sure if that would free them from any liabilities, but then they would still lose the 27k + have a bankruptcy on record.
This sent to Paul Luke, at The Province:
—
Dear Paul:
Many thanks for your recent article ‘Young British Columbians struggle the hardest with debt’ in which you featured the story of the young couple who had recently purchased the $527,000 home in Abbotsford.
We featured this story at the Vancouver Real Estate Anecdote Archive (VREAA), a local blog that focuses on the personal experiences of local citizens enduring the consequences of our speculative mania in housing.
Readers are justifiably puzzled by this couple’s ability to secure a $500K mortgage.
The math simply doesn’t appear to work.
See here for the post and the ensuing discussion:
http://wp.me/pcq1o-3cq
Please clarify the numbers for us.
How did this couple get a $500K mortgage?
Which financial institution gave it to them?
Sincerely
vreaa
(vancouver real estate anecdote archivist)
It’s fun to live in lala land eh, VREAA.
We wouldn’t know. Ask the Khanguras, or any of the other speculators you may know.
I’m sure they are declaring the 12K in rental income on their income tax? Hope someone at CRA makes a note of this…
Excellent point.
High likelihood that 90% of people in this situation are fudging away the income by either not declaring it or fabricating ‘expenses’ against which the income ends up being tax free.
Yet another way in which the bubble has been fuelled by the public purse. Indirect, in this case, but fuel nonetheless.
Actually for basement rentals, I don’t think any fudging is needed. Chances are the proportion of interest, property tax, annual depreciation allowance if it is allowed will take care of the rent pretty easily in most cases. The only way the rent will exceed those expenses is if the ROI rates are good to high (probably 6%+). If that’s the case and with low inflation/interest rate, then we likely aren’t in a RE bubble now would we?
Okay, if that is the case, if this home was sold in 5 years for $1.027M, would the $500K capital gains be tax free?
Surely they should then be expected to pay capital gains tax on the rental suite portion of the home?
Add the implicit guarantees offered by CMHC, No capital gains on principle residences (vs. owning shares), and Home improvement grants and it would be interesting to see what the $$$ amount of subsidization goes on for home ownership.
Honestly who needs that much house? I am constantly floored by the size of houses! Of course then I think about the size of utilities costs, the size of repair bills, the size of the credit card bill each month as you buy masses of furniture for your big house…
They are only using two thirds of the house.
The other third they are renting out.
Anyone else notice the $16000 that went to CMHC?
Their down was $27,000 but wait that doesn’t matter because it just goes on the principal.
Crazy
Do you work three jobs between two people to scrimp and save $27k so you can borrow half a million for a house you can’t afford to use because you need some dude off Craigslist sleeping in your basement to fund your retirement?
You must live in the Best Place On Earth!
When will young couples say “Hell no!” and refuse to buy at these prices, and what on earth would be required for that to happen? How about four jobs between the two of them? Or if the house cost $700,000? Or what if they had to live in the basement while a young family enjoyed the upper floor of their home? I wonder if that would do it.
People can’t just keep paying more and more for less and less while believing that it’s better here than anywhere else on the planet. I am in awe of this bubble.
Agreed.
As to your question, all it will take is for prices to clearly demonstrate that they are capable of dropping.
Instantly, with the hope of perpetual ongoing price appreciation removed, people will see how ludicrous it is to consider buying at these price levels.
The snow-ball will have started it’s descent.
Having grown up in Abbotsford and since moved away, I am baffled why anyone would spend $500,000 to buy a house there. Sure, its “more affordable” than Vancouver houses, but the quality of life I experienced there is not worth $500k. I also do not understand why I should pay $1000/month rent to live in a basement there, when I can pay the same amount to live in an above-ground suite in New West.
Color me baffled.
I hate to say this and I hope I’m wrong. I’ve noticed that recently there are fewer new listings and more sold signs. At least it’s in the Tri-Cities area. Geez, maybe Vancouver is the only dream land on this planet. Even China has come to a market downturn…
Pop!
My understanding is that if you rent a part of principle residence and you sold, the proportional capital gains on the part of the house that you rented will be subject to capital gain tax. However if you stop renting for at least 1 year before you sell then you don’t have to pay any capital gain.
Honestly, the reason what a lot of people don’t get is you flip a house, its tax free – compare that with working a job, where your taxed to death.
Typical east indian homeowners, they’ll work 2-3 jobs, so they dont have to pay any dude’s mortgage