Your clients have been approved for a mortgage, but you’re not sure they’re ready.
One spouse works in a volatile industry, making his employment situation precarious. The other has confided the couple doesn’t have an emergency fund.
Plus, interest rates have nowhere to go but up. So how do you advise them?
Especially for first-timers, you’ll need to explain the financial implications of large repairs or (should push come to shove) unloading the house when the market is down.
Short-term expenses like a new roof or a foundation repair may necessitate shifting cash flow away from a retirement fund, and you may have to switch their risk profiles from speculative to low. If that’s the case, make sure you update their KYC information accordingly.
It also helps to explain the numbers. A $400,000 30-year mortgage at 3.25% on a five-year fixed term has monthly payments of $1,736.
If the interest rate is 2% higher when renewal occurs, your clients’ outstanding balance will be $357,089 and their monthly mortgage payments will jump to $2,128.
That’s a difference of almost $400. Can they stomach that increase?
Clients can offset the risk of interest-rate hikes by increasing their monthly payments, making biweekly accelerated payments, and making lump-sum payments. But they’ll have to find the cash to do so.
Finally, present worst-case scenarios, like job loss for one or both spouses, or an unexpected, costly illness. Tell stories of others who’ve experienced unexpected setbacks, and explain what they had to give up to keep their houses.
Their reaction helps you find out if clients are prepared to sacrifice to keep up with their mortgage payments. If they’re not, they may decide—or you’ll have to tell them—the purchase isn’t realistic.