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Wednesday, July 27th, 2016

To Buy or not to Buy, that’s a Pretty Big Question (part 2) for first time buyers

To Buy or not to Buy, that’s a Pretty Big Question (part 2)

This is part 2 of a 2 part series on down-payments for first time buyers.

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BMO Capital Markets deputy chief economist, Doug Porter estimates that to save a 5% down-payment (as mentioned in part 1 of the article) and have access to the housing market, it would require the average family to save for between 4 and 5 years. He agrees that saving up this down-payment can be very challenging for first-timers.

This is a problem that has to be dealt with even before considering whether you will have access to the best mortgage rates in BC.

According to Porter, this is one of the main reasons that the government has not raised the 5% mandatory down payment. It would simply make purchasing a home far too difficult for many first-time buyers.

And a large downpayment is just the beginning; even if you can obtain one of the best mortgage rates in BC, principle payments can be difficult to manage with today’s home prices.

This wasn’t written to discourage future first-timers from saving up a down payment. If home prices plummet and eat away at your equity, a bigger down payment means you have a larger cushion, giving you more time to make a decision or potentially wait until the market recovers.

Taking some time to save may also increase your chance of getting a better buying price, assuming home prices correct within the near future causing a large selloff. Many forecasters indicate that such a scenario is likely.

Saving a 10% down payment, versus the aforementioned 5% can also save you a few bucks when it comes to interest (particularly if you don’t have one of the best mortgage rates in BC) and insurance premiums. However, the few thousand you might save can easily be blown away by gains on appreciating home values, should the market rise.

The other advantage of jumping into a home now is that you can lock in one of the best mortgage rates in BC, while rates are still low.

There are many things to consider if its your first time buying, including: your current cost of renting versus the cost of owning, other uses for that 5% or 10% you’ll need to save (there are other investments in the world, after all), your emergency fund’s current status (what happens if unexpected but important expenses come into your life?), whether you will be eligible for the best mortgage rates in BC with your current credit score, your current job’s stability and how much you expect to earn in the future.

Fortunately, a lot of strategies are potentially available to help first-time buyers get into a home more quickly. These include: becoming a little more aggressive in cutting your spending, applying for a gift or loan from the bank of mom and dad (such funds have helped many young people get into homes), using the Home Buyers’ Plan (HBP) and borrowing from your RRSP, taking advantage of income tax refunds, getting rid of unnecessary vehicles, pushing a vacation further into the future, or using a grant for first-time buyers if one is available in your municipality.

According to TD Canada Trust’s director of mortgage advice, Farhaneh Haque, the most important things for individuals to consider are their current cash flow, the stability of their job at this point in time, the potential for an increase or decrease in income in the future, and whether they can build a cushion to protect themselves incase mortgage rates increase. If such things are taken care of then pulling the trigger sooner than later can make a lot of sense.

While TD advises first-time homebuyers to try and save 20% for a down payment, this is simply far too big for most people in their 20’s or 30’s today.

But since the best mortgage rates in BC are unlikely to fall further, it may be in your best interest to seriously assess your current ability to get into a home.

If you’re unsure whether or not it’s time to get into the game, consider consulting your local mortgage professional. They have access to the best mortgage rates in BC and can help you run through the mortgage math to see whether the time is right for you.

 

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