Don’t fall into the mortgage pre-approval trap

A recent poll from the Bank of Montreal outlines the hurdles faced by Millennials trying to balance their budgets in an effort to buy a home, citing challenges with affordability and accumulating savings. The first step in house hunting should be setting a budget, but as the poll shows, there are different points of view on what a “house-hunting budget” means.

mortgage pre-approval

  • Forty-nine per cent of respondents say that their budget is the most important consideration when looking for a home
  • In setting up their budget, 67 per cent say that they will determine what they can afford by what their mortgage payments would be
  • Fifty-four per cent say that they are using their mortgage pre-approval amount as their budget guide
  • Fifty-seven per cent worry that they won’t be able to even get mortgage pre-approval because of their debt load.

“Mortgage pre-approvals are a little misleading because lenders approve house hunters for the maximum amount they qualify to borrow with their debt-to-income ratio. A mortgage pre-approval is a tool for house hunters to ballpark their own budget,” says Jeff Schwartz, executive director at the Consolidated Credit Counseling Services of Canada.

“It’s not a suggestion of what your price point is in searching for a home. You should always set your limit well within what your budget allows.”

Housing is a moving target

You’ve got to remember when it comes to taking on the responsibility of home ownership; there are a number of variables, interest rates, job security, life events, and the housing market are among them. You could be faced with less income, more debt and less assets- all of which could mean financial disaster. The best way to protect yourself against this is to minimize the amount of debt that you take on.

Let your head rule

Buying a home is an extremely emotional event. In some cities, you have the additional pressure of rising prices, more demand than supply, and the sense that you’ve got to pay any price just to get a home. Panic sets in when you wonder if you’ll ever be able to  get in to the housing market at all.

Why home ownership?

Why do you want a home at all? Shelter? You can easily rent a place for that purpose. Is it for investment purposes? There are other ways to invest your money that don’t require you to borrow against your investment (like savings accounts or RRSPs).

Is it status? No question, homeownership carries with it a certain status, but is it worth the potential cost to your financial future if you take on huge debt just to have a notch in your status belt?

Or is homeownership a life goal? Is this something you thought you’d always like to accomplish? If this is the case, then you’ve got to treat this as you would other financial goals, with a comprehensive budget and time line.

Having your motivation in mind during your search may temper some of your emotional (and potentially debt creating) reaction when house hunting.

Do you dream of owning a home, but debt is standing in your way? Let us help you reduce your debt load so that you can move forward financially. Call one of our trained credit counsellors or check out our free online debt analysis tool to get started.

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Shivani Karwal
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