Buying a home involves a lot more than touring open houses and making wish lists. Owning a home can be a great investment, but can be a source of great financial vulnerability if you aren’t properly prepared before becoming a homeowner.
“In hot housing markets in Canada, home buyers are looking to get into the market whenever and however they can. With prices rising, it might seem like the smart move to jump in before prices get much higher. However, there are costs and financial implications to consider prior to committing to a purchase,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
“Just like a good home is built on a solid foundation, your finances need to be on steady ground when you make that home purchase. There are some common warning signs that suggest that it would be prudent to delay your home purchase and work on building a stronger financial foundation,” says Schwartz.
Below are 5 signs your should delay your home purchase:
Not experienced with household budgeting
How long (and how effectively) have you had a household budget in place as a renter to manage expenses month-to-month? How well were you able to stick to your plan? Did you keep debt load low and have some extra room left for savings?
With all of the expenses associated with home ownership, the time to learn about budgeting is when you are a renter, not an owner. Sticking to a budget isn’t a habit you want to learn “on the job”. Get used to the routine of budgeting for an extended period of time before you become a home owner.
Home prices too high
If you live in Toronto, Vancouver or other cities where property prices are climbing steadily, it is entirely possible that home prices are beyond your reach. Does your budget reasonably allow you to purchase a home at current prices or are you looking at maxing out your mortgage just to get in?
Housing markets (even hot ones) run in that prices will eventually soften. You need to wait until housing prices fit within your budget, not the other way around.
Your debt-to-income ratio is too high
Your debt-to-income ratio shouldn’t exceed more than 35-40 per cent according to mortgage loan criteria (or less, depending on lending rules and conditions imposed by your lender). You should aim to have your debt-to-income ratio well below that (think 30 per cent or lower) with the addition of a mortgage payment.
You need to leave a wide breadth of wiggle room to accommodate any changes to income or to work with an increase in interest rates. If your debt-to-income ratio is too high, you should defer your home purchase until you’ve brought it down.
Your job isn’t steady
No job is ever 100 per cent safe, but if you are new on your job, work part-time or on contract, work in an industry that is experiencing economic slowdown or frequently change your job, you may want to press pause on your home search.
Job stability is crucial to being able to pay your mortgage every month. The less stable your job is likely to be, the greater the financial risk of buying a home.
You don’t have much of a down payment
Your housing search should start with the accumulation of a substantial down payment, which takes time. You shouldn’t be looking for homes and then trying to put together a down payment. A larger down payment means a smaller mortgage, which will save you a significant amount in interest over the years.
So it’s a good idea to defer your home purchase until you’ve got a sizeable down payment in the bank.