Do you think this is bad planning or greed?
This article “A house-poor couple confronts a looming cash crunch” was posted in the Globe and Mail on May 11, 2015. It got a lot of attention on their facebook page and /r/personalfinancecanada on reddit. A lot of redditors and Globe readers feel no sympathy for this couple and think it’s nothing but greed that has gotten them to this point.
It’s extremely hard to feel sorry for this couple even as you start to read the article. Sure maybe by the end of the first paragraph you might be thinking Oh no, a new baby on the way and they won’t be able to afford it! Until you get to the second paragraph and realize that they have a combined income of 128,000 dollars a year and that they purchased a 747,000 dollar home just four years earlier. That’s 5.83 times their gross salary!
There are a few broad general rules to avoid being house poor and it looks like they ignored every one of them. These aren’t set in stone and different people may be able to afford more or less based on their other spending or saving habits.
The first one is to keep the purchase price within 3-4 times your annual salary. Using this rule they should have been looking for a home within the 384,000 to 512,000 dollar range. This still would have given them a large range of houses to look at. Some people might even say 5 times your annual combined salary is doable but those people are usually the ones selling you the mortgage.
The other rule of thumb or guideline for not being house poor is called the Gross Debt Service Ratio. This basically states that you should spend no more than 30-32% of your gross pay on your housing expenses. This includes your mortgage payments, taxes, utilities, condo fees, etc. This means they should have been looking to get a house with monthly payments topping out around the $3400/month range. They have exceeded this by about 30%
So how did they even get approved for this mortgage?
So seeing that they exceeded the lending rules set out by banks, how did they even get approved for this mortgage? Was it a shady mortgage dealer that performed some creative financing? No! They didn’t even get approved! The banks wouldn’t give them a mortgage higher than $650,000.
So how’d they manage to buy the house? They borrowed $80,000 from family to pay down existing debt and added the wife’s father to the title who is currently retired and collecting his pension. Even the greedy banks said no and they still managed to take on this massive debt load. To top it all off they’re sharing the burden with their retired father, if they can’t pay his pension will be on the hook for it as well.
So is this bad planning or greed?
In my opinion this has gone far beyond the bad planning and is definitely fueled by greed. Only knowing what the article tells us there are two things that really bother me:
- They’re both in the financial services industry – Sure it sounds like they’re probably life insurance or mutual fund salespeople and not financial advisers, but there should be some personal accountability picked up through their training and experiences. They should know better than to load up on debt like that. If there’s a reasonable housing crash in a few years when they need to renew their mortgage term, they may not even qualify anymore. Even if there’s no housing crash and interest rates rise 1-2%, they probably wouldn’t be able to afford that increase without additional help.
- They bought a 4 bedroom, 3500 square foot home with 5.5 bathrooms and no plans of ever having children – Wow! I get that some people really like the space and they had planned on the husband’s parents over to live with them, but did they really need 2 extra bedrooms and 2.5 extra bathrooms? They even have an unfinished basement that they could turn into a few more beds and baths. There’s no need to buy this much space for 2 or even 4 people.
I wish I could say this situation was due to no planning and that it was just two people chasing their dream and didn’t realize they got so far off track. But that’s not the case here; they said they did plan! They made a spreadsheet and realized it’s too much home to afford safely and they went for it anyway with borrowed money and family trust to get them there.
To me this is the peak of greed, they’re chasing this dream that they think will make them happy but it has a very high potential to tear their family apart from the burden of the debt. She’ll be going on maternity leave soon so her income will be drastically cut down and they’ll be coming up $1000 short on their monthly bills according to their calculations, which I wouldn’t believe for a minute considering they thought this was a good idea in the first place. They’ll be taking $500 each month from her retired father, which may or may not strain that relationship.
Luckily, babies aren’t expensive and are usually very little work, especially in the first few years…right guys? Good luck to Mr. and Mrs Bhardwaj, hopefully they don’t get destroyed by this debt monster they’ve created.