House hunting can go one of two ways, you could be lucky and find your dream home right away or it could take you months of searching to find something you’re willing to spend your hard earned and hard saved money on. The very process of finding a house to buy can make deciding if it’s actually a good time to buy a house even more difficult. So when is it the right time to buy a house? When you want to buy a house and when you have the money, this is the short answer but there are so many other issues and variables that could potentially affect your decision.
For the average Canadian purchasing a house, whether it’s their first or fifth, is the largest financial decision they’ll ever make. Here are the most important variables you need to consider before making an offer.
High Interest Debt
Trying to pay for a house while you carry a lot of high interest debt will be extremely difficult and could potentially put your entire financial future at risk. While the initial cost of a house can be quite daunting, the costs you’ll incur once you actually move in, can and will be just as overwhelming. This is why homeownership and high interest debt do not mix. Mortgage payments are not flexible and they don’t come with a backup plan like a credit card’s minimum payment. If you have high interest debt you need to seriously consider paying if off before you purchase a home.
Low Mortgage Rates
If you’re already thinking about purchasing a house then the current historically low interest rates could be that extra push you need to make a decision. While low interest rates shouldn’t be the only reason you buy a house, it is a good idea to take advantage of low rates as you’ll save money in the long run. Mortgage rates currently fall somewhere between 2 and 3%, which compared to the rate your parents had when they purchases their first home is extremely low.
The currently low interest rates won’t always be so low, interest rates fluctuate and chances are at some point in the 25-30 years it takes you to pay back your mortgage, your rates will go up. If interest rates are a huge concern for you should look into choosing an accelerated payment plan, you’ll be able to shave a couple of years off your amortization period and potentially save some money.
If the province you live in or are planning to purchase a house in is experiencing what we like to call a seller’s market you’ll definitely want to take this into consideration while you house hunt. A seller’s market basically means that there are a lot of people looking to purchase houses in a certain market or area but not quite enough good quality houses in the right location to meet the demand. What this does is allows the seller to call all the shots, create bidding wars and list above market prices because they know the demand is high.
In Canada, cities like Toronto and Vancouver often, if not all the time, experience seller’s markets. Purchasing a home in a seller’s market could mean that you’ll need to pay more than you originally budgeted for. So if you’re on a strict budget or are simply looking for a reasonably priced house, you may want to consider avoiding a seller’s market.
Stricter Mortgage Rules
While mortgage rates may be historically low, qualifying for a mortgage has not become any easier; in fact it’s become even harder over the past few years. Although stricter mortgage rules might mean more of a head ache for you while you try to get approved and find a house you can afford, the federal government introduced these stricter regulations to help prevent serious housing issues. (Click here to learn more about how your home might be causing your financial issues.)
Probably the biggest change and the one that might affect you and your mortgage the most is that the maximum mortgage amortization period on high-ratio mortgages (where the down payment is less than 20% of the purchase price of the house) was changed from 40 years to 25 years. This means that high-ratio mortgages now need to be paid off in a maximum of 25 years, not 40 years which in turn means the financial burden of owning a home is even greater than ever. A shorter amortization period means that your monthly mortgage payments will be higher which means that not as many people are able to afford houses as they don’t have the income to cover the costs. If you’re thinking about purchasing a home we can’t recommend enough that you create a budget before hand, this will allow you to see if you can afford to own a house.
Need more information on amortization? Click here.
Is Now the Right Time to Buy a House?
If you take into consideration the above four variables then you should be able to decide for yourself when the right time to purchase a house is for you. The most important steps you can take to prepare yourself are to paying off your credit card debts, save enough for a significant down payment and learn to live within a budget. After that it’s up to you to take the first steps towards homeownership.