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’re not alone.

Over the past few years, 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.

According to a survey, there are 3 main factors (aside from a lack of cash flow) deterring Canadians from entering the home buying market:

• Anxiety over personal debt load
• Perceived difficulty imposed by the ever-changing mortgage stress test
• Uncertainty over fluctuating interest rates

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 you encounter, there is a solution.

1. If debt is what’s stopping you from buying a home, you can conquer that obstacle beginning with a plan.

The reason many Canadians remain perpetually in debt is because they don’t chart a course for getting themselves out of it—and education members seem to know about this all too well. 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.

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 world of home ownership sooner rather than later), you may have to make some non-essential spending cuts to your budget. So, be sure to re-evaluate every non-essential purchase. Even the ones that may seem nominal (like those daily coffees)—because your budget will only work if there is a commitment to sticking to it.

While all this budgeting may be difficult to follow 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, on your home ownership dreams. But before those dreams can come true, you need to pay down debt, so you can finally make that down payment.

2. If uncertainty over fluctuating 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 fluctuating interest rates stop you from making the kind of substantial investment that comes from 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.

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. That’s the benchmark most lenders consider as being a ‘good’ credit balance.

3. If the mortgage stress test is what’s deterring you from buying a home, there is some good news.

Instead of viewing it as a dreaded test, think of the mortgage stress test as more of a way to foolproof your finances. While it 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.

In addition, there is a 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.

Learn more about the First-Time Home Buyer Incentive.

In addition to the First-Time Home Buyer Incentive, the First Home Savings Account (FHSA), can help you save for a down payment. The FHSA is a new registered account, that allows holders to contribute $8,000 per year up to a lifetime maximum of $40,000. Contributions into an FHSA are tax-deductible and withdrawals are tax-free.

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.

Sources:
https://torontostoreys.com/2019/04/canadian-home-buyers/
https://www.cbc.ca/news/business/mortgages-stress-test-rate-1.5217790
https://globalnews.ca/news/5659838/mortgage-stress-test-rate-bank-canada/beta/?

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