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If you’re a wannabe homeowner, it’s disheartening to think that rising interest rates and costs may mean it’s no longer affordable, especially in some of the most expensive cities such as Toronto and Vancouver, but your dream could still become reality with some creative planning and resourcefulness.
To figure out how to make it work, it helps to understand the qualification process. The mortgage amount a buyer qualifies for is based on household income, money available for a down payment, and money owed to outstanding debts.
If you’re a single person, it can be even more challenging to afford a place on your own. To get an idea of how much of a mortgage you qualify for, check out a free online mortgage calculator from your bank / lender, the Financial Consumer Agency of Canada or Canada Mortgage and Housing Corp.
If you find you aren’t able to afford to buy a home, consider some of the following options as you plan for homeownership during these difficult times.
Reduce your overall debt load beforehand: Outstanding car loans, credit cards and lines of credit will reduce the mortgage amount you qualify for. Eliminating these debts first will increase the mortgage you are able to obtain.
Increase the amount of your down payment: The more money a borrower has available upfront, the less of a mortgage they need to qualify for. If you have investments in a registered retirement savings plan (RRSP), you can borrow from yourself under the Home Buyers’ Plan to help make your new home more affordable.
Just be sure to adjust your homeowner budget to allow for annually repaying 1 / 15th of the total you withdrew from your RRSPs. Failing to repay yourself means the outstanding amount due that year will be considered taxable income.
Consider joint ownership: Buying a home with a trusted friend or family member who wants to invest in real estate or get into their own place can lessen the purchase burden. Two (or more) people with income on the application equates to a higher mortgage that you can qualify for. And a slightly larger home is going to be more affordable than two smaller homes.
If this is something you might want to try, make sure you choose your co-owner carefully. For example, it could make for a tense living situation if you hate clutter and your co-owner is less organized. Another option is to buy a home with two distinct living spaces around a shared common area.
But be sure to put any agreement in writing after each of you seeks independent legal advice. This will also prevent unnecessary conflict when you decide to sell.
Buy with the intent to have a renter: If there is a self-contained suite and you have a rental contract, then depending on your lender’s guidelines, 50 per cent to 80 per cent of that expected rental income can be used to qualify for the mortgage. This can help a new homeowner get into the market more quickly than having to wait until they have a large enough down payment to make the mortgage affordable.
Take in a roommate to prevent being house poor: If you qualify for the mortgage amount you need, but are concerned about ongoing maintenance costs, then income from a roommate (s) can provide a solid emergency fund. Set the rental income aside so that the money is available for upgrades or the inevitable repairs every homeowner faces.
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Look at owning in smaller places: Bedroom communities can often be more affordable than larger centers. If you no longer need to commute to work every day, this option becomes even more reasonable. However, if faced with a longer daily commute and inflated gas prices, you may need to do a cost-benefit analysis to ensure you can afford to live outside the city.
Get rid of your car: If you want to own a home in the city, you can free up room in your budget by eliminating your vehicle costs. Owning a vehicle is a significant financial investment, consisting of much more than a monthly loan or lease payment. There are also the added costs for insurance, parking, maintenance and repairs.
If you work from home most of the time, you may find you do not need a vehicle. Using public transportation, taxis, ride-hailing or a car co-op / ride-sharing service can be inexpensive ways to get where you need to go without limiting your homeownership options.
If all of these options seem overwhelming, contact a not-for-profit credit counseling agency for a free financial review. There are homeownership alternatives you might not have thought about.
You may also wonder if buying or renting for a while longer is right for you. An impartial, knowledgeable evaluation of your situation will give you peace of mind and help ensure you are on the right path to turning your dream into reality.
Sandra Fry is a Winnipeg-based credit counselor at Credit Counseling Society, a non-profit organization that has helped Canadians manage debt for more than 25 years.
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