The top 3 factors deterring potential home buyers (and how to conquer them)
If you’ve been finding it challenging to enter the home buying market, you are not alone.
Over the past few years, Canadians have been applying the brakes when it comes to their prospective home purchasing plans.
And there is more than one reason for the trepidation, including:
- Down payment hurdles
- Personal debt load and higher costs of living
- Uncertainty over interest rates and lending regulations (mortgage stress test)
However, for every home buying challenge you encounter, there is a strategic financial solution.
1. Down payment hurdles
Coming up with a sizeable down payment tends to be the biggest obstacle for aspiring home buyers.
Under Canada’s strict home buying regulations, you would be required to make a minimum down payment of no less than 5% on the first $500,000 and 10% on the balance up to $1.5 million.
We know what you’re thinking. That’s a lot of money to come up with—especially in today’s economy.
That’s where the following down payment strategies can make saving a lot less daunting:
- Budget: This word comes up quite often when it comes to personal finance challenges and for good reason. Without sticking to a budget, you won’t have a financial plan to serve as your guide for keeping your money in check and your down payment savings timeline on track.
Click here to read more about how to build a budget that works.
- First Home Savings Account (FHSA): Once you’ve allocated savings in your budget, contribute that money towards a FHSA, which is a registered account designed specifically to help you save for your down payment. Contributions are tax-deductible and withdrawals are tax-free.
- Home Buyers’ Plan (HBP): Allows eligible first-time buyers to withdraw up to $60,000 from their RRSP without paying immediate tax. The funds have to be used toward a down payment and must remain in the RRSP for at least 90 days before withdrawal (with repayments generally spread over 15 years).
2. Personal debt load and higher costs of living
With the price of consumables continually rising, more and more Canadians are having to place a greater reliance on credit cards to cover everyday costs. The greater that debt becomes, the harder it is to pay off or to save money for a down payment (or any other financial goals).
The reason many Canadians remain perpetually in debt is because they don’t chart a course for getting themselves out of it.
According to the 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 a little guidance from a financial specialist and a well-crafted plan.
In order for your plan to be successful, it 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 (using a debt calculator to factor in interest payments) and divide the total by the number of months in your timeline.
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 financially realistic.
If that’s the case, consider adjusting your expectations by extending your timeline. Whether you need to add another 6 months, 12 months, or more—continue adjusting the timeline as necessary until you’re comfortable from a budget perspective.
3. Uncertainty over interest rates and lending regulations (i.e. mortgage stress test)
If you’re concerned about interest rates creeping up, remember that the rates on a mortgage are still typically lower than other types of borrowing—even after you’ve factored in the mortgage stress test.
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 fluctuating interest rates stop you from making the kind of substantial investment that comes from owning a home.
If the mortgage stress test is what’s deterring you from buying a home, remember that context is everything.
Instead of viewing it as a dreaded ‘test’, think of it more like a way to foolproof your finances.
While the stress test may reduce your buying power slightly (which can be perceived as a negative), it ultimately protects you from taking on way more mortgage than you can afford, should interest rates suddenly hike.
That’s a very positive thing.
Still have questions about interest rates, the mortgage 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 mortgage agents 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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