Getting your foot in the door as a first time home buyer

Housing affordability makes ownership difficult for first time home buyers

first time home buyerOwning a home is a major financial goal for most Canadian families.  However, soaring housing markets in major city centres, such as Toronto, Montreal and Calgary, make affordability next to impossible for many first time home buyers.

So much so, that the recent Housing Trends and Affordability report released by RBC Economics research, indicates an eroding housing affordability in some of Canada’s hottest markets.

According to the report, the average amount of pre-tax income required to own a home in major markets is as follows:

  • Vancouver – 85.6% of pre-tax income is dedicated to home ownership costs;
  • Toronto – 3% of pre-tax income  is dedicated to home ownership costs;
  • Montreal – 37.2% of pre-tax income is dedicated to home ownership costs;
  • Ottawa – 35.4% of pre-tax income is dedicated to home ownership costs; and
  • Calgary – 32.8% pre-tax income is dedicated to home ownership costs;

Simply put, based on the average household income, home ownership in Vancouver (mortgage payments, utilities and property taxes) would take up roughly 85 per cent of a typical household’s monthly pre-tax income.

“With affordability so out of control in our major city centres, it’s no wonder first time home buyers are having trouble getting their foot in the door,” says Jeff Schwartz, executive director for Consolidated Credit Counseling Services of Canada.  “What’s even more concerning is the amount of debt families are going to have to take on in order manage these out of control housing costs.”

The general rule of thumb is that housing costs should never exceed 30 per cent of gross household income.  Based on the high price of living in one of Canada’s urban centres, affordability is next to impossible.  And when affordability is low, debt tends to be high.

“If you are a first time buyer, or someone looking to keep your housing costs down, I would recommend looking outside our major cities,” adds Schwartz.  “But before you even begin to consider homeownership, it’s important to get your financial house in order.  This means creating a budget and putting a solid savings plan into place.”

Keeping affordability in mind, Schwartz and the team at Consolidated Credit offer these tips to help first time buyers save for an affordable down payment:

  • Open a savings account. Open a high interest savings account or a Tax Free Savings Account (TFSA) immediately.  Start transferring a set amount of money from every paycheque.  Better yet, set your savings up as an automatic withdrawal from your paycheque to make savings invisible.  Whatever you do, do not touch this money until you are ready to make your home purchase.
  •  Start a budget. Sounds like a no brainer, but you would be shocked at the number of Canadians who don’t budget their money. Using a spreadsheet, start with your gross monthly income and subtract the taxes and other costs from your pay stub to get your net monthly income. Then list your monthly expenses, such as rent, student loans, car payments and credit card bills.  Now take a look at how much is left, and ask yourself how do you spend it?Start keeping receipts for things like entertainment, clothing, restaurants and anything else you spend money on.  By tracking your spending, you will get a clear picture of how much money comes in and how much goes out.  By changing your spending habits, you can free up more money to put towards your ultimate savings goal of home ownership.
  • Check interest rates. Interest rates vary per product. From credit cards to student loans and financing agreements, you are likely paying a lot of interest.  Go through every bill and account you have to check the interest rates.  Now get on the phone.  If your credit is in good standing, there is a solid chance your creditors will consider lowering your interest rate.  This will ultimately free up more cash to put towards your down payment savings.
  • Check your credit. Your ability to borrow and the rate you pay are all closely associated to your credit score. Your ability to obtain a mortgage at an affordable rate will depend on how favourable your credit score is. Unfortunately, an alarming number of credit reports contain errors that can negatively affect your score.    Take the time to check your report for factual errors and out of date items several months before applying for a mortgage.  This will give you enough time to clean up your report and improve your score.
  • Put windfalls to work. Saving for a down payment is a long term process.  At current housing prices, you are going to have to save thousands in order to make a 25% down payment, which will take time.  While it is important to save by spending less, it is also important to put any cash windfalls to work for you.  Think of those occasions that bring extra money into the household – birthdays, bonuses, tax refunds and weddings.  Don’t be tempted to splurge when you come into extra money.  Instead, use these windfalls to increase your savings account and reach your financial goal faster.

 

If unsecured debt has made home ownership completely unaffordable for you, it is time to get your financial house in order. And we are here to help! Call today to speak to a trained credit counsellor and find out how you can get your budget under control.  You can also try our Free Debt Analysis online and a counsellor will reach out to you

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