The Learning Centre:
The top 3 factors deterring potential home buyers (and how to conquer them)
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If you’ve been finding it challenging to enter the home buying market, you’re not alone.
Over the past year, Canadians from coast-to-coast have been applying the brakes when it comes to their prospective home purchasing plans. And there is more than one reason for the trepidation.
A recent survey revealed that, aside from cash flow, there are 3 main factors deterring Canadians from entering the home buying market:
- Anxiety due to current debt load
- Uncertainty over (rising) interest rates
- Perceived difficulty imposed by the mortgage stress test
Like a series of dominoes, each of these deterrents has a direct impact on the other.
For example, the greater your debt, the tighter your cash flow (which means less money available to save for a down payment). Every time interest rates go up, that debt load becomes even more expensive to carry. Rising rates can also lessen the amount of mortgage you qualify for, once you’ve factored in the mortgage stress test (which measures the amount you qualify for against the Bank of Canada benchmark interest rate).
However, for every home buying challenge there’s a solution… or in this case, solutions, which the financial specialists at Educators can help you implement based on your specific financial situation.
If debt is what’s stopping you from buying a home, you can conquer that obstacle beginning with a plan.
Many Canadians remain perpetually in debt because they don’t chart a course for getting out of it. Education members know this firsthand: according to Educators’ Financial Kickstart Challenge 54% of your peers have been sitting on non-mortgage debt over the past several years. That debt could have been paid down (or paid off) by now, with help from a financial specialist and a well-crafted plan.
Your plan should include a realistic timeline and budget.
Is your goal to purchase a home a year from now? Two years? You should aim to have any non-mortgage debt cleared (or at least mostly paid off) within that timeframe.
To see if your timeline is realistic, add the total amount of your outstanding debt and divide it by the number of months in your timeline. For example, if you’re carrying a debt load of $20,000 and your goal is to pay it off within two years, you would need to make payments of roughly $900 a month. That’s $20,000 divided by 24 months, assuming your combined rate of interest on that debt is similar to that of an average line of credit (8%).
Tip: Ready to stop paying more interest on your debt than you have to? Read this to learn how.
After all of the calculations (and depending on where you are on the pay grid), you may discover that your timeline is not realistic financially.
In that case, consider adjusting your expectations by extending it. There’s nothing wrong with that. Continue adjusting your timeline as necessary until you come up with one that you’re comfortable with, from a budget perspective.
Speaking of which, a budget works part and parcel with your timeline.
Without a good budget, you won’t have a spending plan to serve as your guide for keeping your money in check and your (debt repayment) timeline on track.
If you want to expedite that timeline so you can join the home ownership world sooner rather than later, you may have to make some spending cuts. Re-evaluate every non-essential purchase, keeping in mind that your budget will only work if there’s a commitment to sticking to it. While all this budgeting may be difficult to adjust to at first, remember that every dollar you save is contributing to a greater goal. Just keep your eye on the ball (or in this case, your home ownership dream): to pay down debt, so you can finally make that down payment.
If uncertainty over rising interest rates is what’s deterring you from home buying, remember to keep one thing in perspective.
The rates on a mortgage are typically still lower than other types of borrowing.
Even after you’ve factored in the mortgage stress test, mortgage rates still generally beat out interest you would pay on credit cards and other types of loans.
And remember that, like the market, interest rates are cyclical. They will go up. They will go down. And they will repeat this process until the end of time. Don’t let the fear of rising interest rates stop you from making the kind of substantial investment that is owning a home.
Instead of worrying, get ahead of rising rates by focusing on paying down non-mortgage debt.
Besides freeing up cash (which you can then put towards owning a home), paying off non-mortgage debt can also improve your credit score. This then improves your chances of getting a mortgage loan.
To help you with that, remember the ‘75-50-30 rule’:
Paying your balances down to below 75% of your credit limit significantly improves your credit score. Paying them down to less than 50% of your credit limit improves your score even more. If you have to maintain a balance on non-mortgage debt (such as credit cards), aim to keep it at no more than 30% of your limit (the benchmark most lenders consider as being a ‘good’ credit balance).
Naturally ‘zero’ is the best balance of all.
If the mortgage stress test is what’s deterring you from home buying, there is some good news.
Back in July 2019, the Bank of Canada lowered the benchmark rate used by mortgage stress tests to 5.19% (from 5.35%). According to Ratehub.ca, that rate change now affords the typical borrower 1.4% more in mortgage-borrowing power. While it may not seem like much, it does provide a little more breathing room when it comes to the mortgage amount you qualify for.
In addition, there is a brand new government program for first-time home buyers that can also ease the financial pressures of the mortgage stress test.
Aptly named the ‘First-Time Home Buyer Incentive’, this program provides an interest-free loan to qualifying buyers. The amount of the loan differs on a case-by-case basis, however, it can be as much as 5% of the property value for pre-existing home purchases and up to 10% on newly built homes.
Pros: the loan is interest-free; the amount provided can increase your down payment, which means a lower mortgage amount (note that borrowers still need to come up with at least 5% on their own).
Cons: the loan must be paid back at the earlier of 25 years, or at the time of sale (whichever comes first); the amount owing appreciates along with the value of your home.
Still have questions about interest rates, the stress test, or the home buying process in general? Reach out to Educators Financial Group.
Since 1975, we’ve been helping education members make sense of changes in the home buying market. Plus, our educator-specific knowledge means we can provide you with the right borrowing solutions to suit your specific needs, goals, and budget—no matter where you are on the pay grid or what your income is in retirement.
Have one of our lending specialists get in touch with you.
Curious as to how much mortgage you can afford? Use our handy mortgage calculator to find out.
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The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.