I recently read a news story about a young Chilliwack doctor’s open letter to our provincial government about being priced out of Metro Vancouver’s housing market. He wrote, “As a highly trained medical doctor, I shouldn’t have to choose between living where I want and living in a home I want. My choices shouldn’t be a huge house anywhere else in Canada or a townhouse in the Fraser Valley.” If anything, this letter speaks more to me about the (sometimes unrealistic) expectations we have as young adults and the ensuing disappointment that occurs when we realize that life involves hard choices.
I remember talk of a hot housing market in Vancouver in or around 2004. At that time I was 32 years old, a single mom and at the beginning of my career as a Licensed Insolvency Trustee. Like this young doctor, home ownership appeared to be out of reach for me. I had a pile of student loans and virtually no savings because I was focused on repaying my student debt. But in reality, Vancouver’s pricy housing market wasn’t the reason I was not able to buy a home – it was my debt. I worked my butt off over the next five years to repay my student loans and save toward a down payment. In January 2008, together with my spouse at that time, I became a first-time homeowner at the age of 37. That may seem pretty old to the young people out there, but I assure you it goes by in a flash.
While the housing market can seem daunting, it’s important to remember it’s never too late to become a homeowner, even in Greater Vancouver. I totally get it when people say homeownership in Vancouver seems impossible, but it’s not - you just have to start planning, you have to manage your expectations and you have be patient. And in the meantime, you need to do these three things:
Pay off consumer debt
One of the many criteria mortgage lenders look at in assessing your eligibility for a mortgage is your debt ratios. Debt ratios measure your ability to repay the mortgage by ensuring your total debt (credit cards, student loans, car payments, etc.) does not exceed a certain percentage of your income. Outstanding consumer debt affects how much you can borrow in the form of a mortgage, which may effectively price you out of any housing market, be it in Vancouver or elsewhere.
The less consumer debt you are servicing, the greater your mortgage borrowing power. If you feel that you have lost control of your debt, seek help from a professional who is qualified to assess your consumer debt repayment ability and your debt repayment options. A Licensed Insolvency Trustee is a qualified professional and will be able to provide a free, confidential, unbiased assessment of your unique situation and help you understand all of the options available to you so you can choose the best route to getting out of debt and start working towards your long-term financial obligations (like buying a house for instance).
Start saving your down payment
In Canada, you must provide a down payment of 5% on the first $500,000 and 10% down on the next $500,000. For example, for a $750,000 property (which leaves you priced out of a metro Vancouver detached home, but still able to buy in other areas of Greater Vancouver), you need a down payment of $50,000.
Think saving $50,000 is impossible? It might feel that way at first, but if you are willing to start now you will get there eventually. If you can save $1,000 per month, it will take you just over four years. If you can save only $500 per month it will take you just over eight years. I know eight years seems like a long time, but wouldn’t you rather own a home in eight years than never?
Improve your credit score
Your credit score determines what mortgage interest rate a lender will be able to offer you. Although interest rates are currently at an all-time low, home prices are high and therefore you will likely pay hundreds of thousands of dollars in interest over the life of your mortgage. On a $700,000 mortgage spread over 25 years, the cost of borrowing at 2.5% is $240,729.49, while the cost of borrowing at 3.0% is $293,815.34. That’s over $53,000.
The interest rate also has a huge impact on your monthly mortgage payments, accordingly qualifying for the lowest available rates should be a priority and can be accomplished with advance planning.
Creating a comprehensive budget and getting a firm hold of your finances will not only boost your personal morale, but will also give you a full perspective of where your money is going so you can find manageable compromises that allow you to set aside the money you need to ‘feel right at home’ in your own space.
View my original post at MNP Debt here.