In cities where housing prices are high, like Toronto, Vancouver and surrounding areas, buying a home is extremely expensive. Fueled in part by the “Fear of Missing Out,” home buyers are routinely maxing out their mortgage debt, just so they can get into the market.
“The problem is that substantial mortgages are pushing many people right up to their debt ceiling. The downside of taking out a large mortgage used to be about being house poor. Now maxing out your mortgage is causing people to live dangerously close to their debt breaking point in a paycheque- to paycheque environment with little or no cash savings,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
Here are some ways to keep clear from your debt ceiling by maintaining mortgage and other debt low.
Set your housing budget and stick to it
In a hot market that is characterized with bidding wars, it is normal for house hunters to suffer from buyer’s fatigue as they deal with the emotions of trying to buy a home and lose out multiple times.
“For the sake of your budget and your financial health, you need to let your head rule your heart when it comes to buying a home. It can be tempting, especially if you’ve been looking for a home for a while, to push your budget up, just so you can secure a house,” says Schwartz.
According to a study from HSBC, 42 per cent of buyers ignored their budget and spent more than they intended on their home purchase. Doing so may seem like a good idea at the time because you secure a home, but the more mortgage debt you assume, the more vulnerable you are.
You need to establish a budget that will keep your mortgage payments manageable and take into account the possibility of rising interest rates. You also need to have the cash flow to be able to put money into savings. That means staying well below your debt ceiling.
Get rid of high interest debt
It is preferable to be debt free when you buy a home, but that isn’t always possible. What you should do though is get rid of your high interest debt as a minimum before you purchase a home. Your credit cards and lines of credit are also vulnerable if interest rates go up, which will push your debt ceiling higher.
Pay debts off, consolidate on a lower interest card, or get a consolidation installment loan.
Don’t rely on credit to cover costs
You need to consistently spend within your means. That means not using credit as a way to extend your budget. Don’t rely on credit as your emergency fund or as a means to tend to your housing repairs and maintenance.
Find ways to cut your housing costs
Your mortgage isn’t the only cost that you’ll need to manage as a homeowner. In addition to repair and maintenance, you’ll need to spend money every month on energy and water bills. Get in the habit of conserving water and energy wherever you can, which will greatly reduce your bills.