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The prospect of being on the hook for mortgage payments for the next quarter-century would make the heart of every first-time buyer pound. Signing the dotted line for the largest debt you’ll ever owe is, at the very least, a stressful decision.

“For most people, by and large, it’s the biggest expense they’ll ever have in their life,” says Dr. Moira Somers, a family wealth psychologist and executive coach based in Winnipeg. “There needs to be a ‘gulp’ response to that and a real determination about, ‘Is this the right time? Is this the right place, the right decision?’”

Reducing stress caused by mortgage debt can begin before your pre-approval, mortgage stress test or saving for your down payment. Determining if a mortgage fits your needs, goals and is a choice of your own making beforehand is an important step. The Financial Planning Standards Council found that one in two Millennials, those between the ages of 18 and 34, feel pressure to financially keep up with their colleagues. Millennials also feel the most embarrassment over a perceived lack of control over their financial situation compared to other generations, according to the FPSC. This pressure, combined with a lack of financial education and subpar communication between couples when purchasing together, eventually leads to high levels of mortgage debt stress.

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“We need to make sure that people aren’t being pressured into homeownership just because someone thinks it’s the financially prudent thing to do. For many people, it is not the prudent thing to do,” says Dr. Somers.

If you’re worried about taking on a mortgage, don’t sweat it. We asked Dr. Somers and mortgage broker Elan Weintraub for their advice on four essential questions first-time homebuyers should ask themselves to avoid mortgage stress.

1. Are you a victim of Economic Outpatient Care?

Asking the Bank of Mom and Dad for help with home buying is common these days. In a poll conducted by CIBC, 76 percent of Canadians said in 2017 that they would financially support their adult children. In hot real estate markets such as downtown Vancouver, where the average price of a new build condo is hovering around $2,000 per square foot, it can be tough for first-time buyers to meet mortgage requirements. Parents may step in to co-sign on the mortgage or offer money towards the down payment to help their children secure homeownership. While Dr. Somers says this is a kind gesture, parents should be cautious about giving their children a false sense of financial security.

Photo: LendingMemo.com

“Parents will give a downpayment so that the banks will give the kids a loan, a mortgage,” says Dr. Somers. “Sometimes, these kids have no business being in a home because they do not have a solid enough income stream to merit it.”

Dr. Somers refers to the economic theory of ‘Economic Outpatient Care’ from the book The Millionaire Next Door. The authors, Thomas Stanley and William Danko, explain that adult children of wealthy parents often fall victim to a false sense of financial stability if they receive monetary support. This causes them to purchase homes in affluent neighbourhoods beyond what they can afford, leading to mortgage stress, house poorness and financial instability.

Dr. Somers says that this concept follows a common problem she sees today: young buyers are pushed into homeownership by their wealthier parents who still view owning real estate as an expectation of adulthood.

“For generations, there was this notion that if you could buy, you ought to,” says Dr. Somers. “There really weren’t a whole of compelling reasons to rent unless you couldn’t afford not to, or if you knew you were going to be transient.”

Even as homeownership becomes more difficult to achieve in expensive real estate markets, Dr. Somers says these parental expectations still exist. If new homebuyers are to avoid future stress caused by mortgage debt, Dr. Somers says it’s best that parents and their children get on the same page as to who’s paying, how much, and if a mortgage is the better choice over renting.

“Young people, and their parents and older people who are advising them, need to really be aware of the fact that things have shifted,” she says. “What used to be excellent advice for generations previously, it’s a different landscape now.”

2. Are you financially conscious?

In her years as a psychologist, Dr. Somers has met many people and couples who resist being “financially conscious” — being totally aware of your current financial situation.

A lack of financial consciousness can manifest as stress and symptoms such as hypervigilance, spend-binging and secret shopping from spouses. This is often the result of a homebuyer’s lack of understanding about their expenses, along with patterns of poor saving and communication. Homebuyers who didn’t account for the additional costs of ownership prior to buying, and who are suffering from financial stress, can accumulate more debt in an attempt to remedy their situation.

“If you’re not putting money aside to cover [expenses], you have no option but to immediately incur debt when they come along,” says Dr. Somers. “That’s where we get into this terrible cycle of needing to apply for home equity lines of credit and consolidations, which have a physiological effect of making you feel like you’ve zeroed the debt — but you have not zeroed the debt. You have incurred new debt on top of that massive mortgage.”

Photo: CreditRepairExpert

One strategy to becoming financially conscious, according to Dr Somers, is to examine periodic expenses prior to ownership — expenses that aren’t an emergency but aren’t part of your monthly home budget either, such as annual home insurance payments. Weintraub also says paying over your original mortgage budget can set you up for stress down the road. Conducting a thorough pre-approval process beforehand will set expectations before you buy.

“Understand your limits are and what your situation is, because sometimes a lot of stress is, ‘My budget is $700,000,’ and then sure enough, they buy at $775,000,” says Weintraub. “That’s going to create stress. If you’re thinking of going to $775,000 in that scenario, have a discussion with your mortgage broker in advance of buying it, not after.”

3. Will you rent out that spare bedroom?

If you’re stressing that your mortgage payments are just a drop in the endless mortgage loan bucket, Dr. Somers recommends turning your home into an active revenue generator.

“If you’re going to buy a house, there’s ways of making that work for you,” she says. “Perhaps you can rent space in your garage, if you’ve got an extra bay. Turn this house into not only something that you pour money into, but that can help you pay for itself.”

Homeowners have many options to earn money from their extra space: renting a room out on Airbnb, flipping the basement into a rental suite, or leasing out the garage as a storage unit, to name a few. However, keep in mind that this extra cash will help you pay the mortgage, not qualify for one. Your granny-flat rental, or other side hustles, will not necessarily be counted as income by future mortgage lenders.

“Let’s say the husband drives Uber, and the wife does some photography on the side, and they rent out their basement. Realistically, they’re not financially stressed, but the bank is arbitrarily thinking that they’re stressed,” says Weintraub.

Extra revenue should be treated as a supplement, not a replacement.

4. Is renting the better option for now?

The decision to keep renting might not just make financial sense, but it may also be more practical. If you don’t plan on staying in one place for at least five years, Weintraub says committing to a mortgage might not make the most sense.

“If you’re not sure where you’re going to be and you’re thinking of moving to the West coast, then renting might be a better solution because it’s easier to leave a rental than selling a property,” he says.

Selling your home usually costs four to five percent of the home value, plus transfer taxes, according to Weintraub. Selling your home after less than five years of owning it could cost you in mortgage penalties and other fees. Hence, if you’re looking to avoid mortgage debt stress, Dr. Somers says it’s important to determine if buying is the best choice for yourself, not to mention your relationship.

One of the most common causes of divorce is fighting about money. Some couples in their second or third marriages, says Dr. Somers, have decided to forgo mortgages altogether and stick with renting to avoid money conflicts. Engaging in good planning and communication in all aspects of mortgages and finances should eliminate money stress, she says.

“When stress gets to a certain level, it doesn’t create loveliness in our lives or our behaviour.”

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Sign up for The Ladder newsletter, your essential guide to making the jump into the housing market.

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