Affordability is a necessity for first-time homebuyers regardless of their financial situation
Derek Sankey
Sun
Sue and Paul Anderson, pictured with son Trystan, are happy to be moving into their first new home, in Calgary. The family, troubled with credit problems for years, was approved for a $ 400,000 mortgage. CHRISTINA RYAN/ CNS
Paul Anderson and his wife, Sue, felt like they could only dream of home ownership. After having some credit problems, the effects of which lingered on for several years, they got their financial house in order and got up the courage to apply for a mortgage a few weeks ago.
Much to their surprise, and after some negotiating, the couple were approved. “I looked at my wife with a tear in my eye and realized … I might get a house,” says Paul, 42.
The couple have three children.
“There’s good people out there with good jobs that really don’t have a lot to bring to the party, but they’re already paying $1,600, $1,800 a month [in rent] anyway,” he says.
“At the end of the day, I’m a proud owner of a new home.”
It’s one of the best buyers’ real estate markets in years, with interest rates at historic lows, falling house prices and new incentive programs available. But many consumers — including many first-time homebuyers — lack the knowledge and preparation to determine how much they can afford.
Banking experts say this is the first crucial step toward making any successful real estate transaction. Yet many consumers are missing out on opportunities to determine how much they can afford and they are overlooking tools available to help them get into home ownership.
The Andersons, for example, had no idea what to expect before they were approved for a $400,000 mortgage for a new Calgary home.
“It should start with getting pre-approved and not being intimidated by the process,” says Laura Parsons, area manager in specialized sales with Bank of Montreal (BMO).
Many people think home ownership is out of reach because they haven’t done the calculations or sought expert advice about their options.
“We look at university professionals or trades people coming out of school with all this student-loan debt, but it doesn’t mean you cannot get into home ownership,” says Parsons. She notes banks can consolidate debt to reduce monthly payments.
A pre-approved mortgage establishes realistic expectations about what you can afford based on your gross debt service ratio — your gross annual income relative to the principal and interest of the mortgage plus typical heating costs and property taxes.
Canadian guidelines state those costs cannot exceed 32 per cent of your gross annual income.
“Pre-approval … really demonstrates that a buyer is serious and that can help you with negotiating with sellers and agents,” says Bernice Dunsby, senior manager of home equity financing with Royal Bank of Canada (RBC).
It also allows buyers to lock in their interest rates for 90 days in the event that rates go up, or they can take a lower rate during that time frame if rates go down further.
You must now have at least five per cent of the cost of the mortgage as a down payment.
If it’s less than 20 per cent, it gets classified as a “high ratio” mortgage and will require insurance.
Despite gloomy public perception, banks are working with all types of people to develop home ownership plans and doing everything they can to get you a mortgage that works for you.
It’s not just young couples with children who are buying these days, either.
“It’s not your traditional buyers,” says Parsons. “There are options for everybody.”
While it’s one of the best markets right now to buy, be realistic and work with an expert since each individual’s affordability is different.
“Don’t get caught up in the hype of the opportunity, but sit down with a specialist and determine what’s right for you,” says Dunsby. “You don’t want to stretch yourself too thin.”
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