How to Be as Debt Free as Possible Before Buying a HomeNov 15, 2016
While the Government of Canada’s new mortgage rules are aimed at protecting buyers in the GTA and Vancouver from taking on too much mortgage debt, these rules can really protect prospective home buyers across Canada. For millennials trying to purchase their first home, new “stress test” rules will have an impact on how much home you can afford. Focusing on reducing current debt can help improve your home buying power. And while it may not be possible to be debt free before taking on mortgage debt, it’s important to look for ways to reduce your debt beforehand.
Under the new rules, prospective homebuyers will now need to go through a stress test of their debt in order to qualify for a mortgage. Interest rates are still low for mortgages and the Government wants to make sure homebuyers can handle the debt load, if interest rates rise in the coming years. This means to qualify for a mortgage they will have to do so at a higher interest rate than the one they may actually receive from the lender. What can you do to ensure this new rule doesn’t negatively impact your ability to qualify for the mortgage of your new dream home?
What do you need to know about your current finances?
The first step is to gain a thorough understanding of your financial situation, and with November being Financial Literacy Month, it is a great time to do an in-depth financial review. This can help set realistic expectations before you start the process of trying to get pre-approved for a mortgage. When completing the review you will want to involve all parties that will be qualifying for the mortgage. You’ll be reviewing total income, savings, and total debts (including monthly payments and interest rates). Also remember to look at your credit scores to make sure there is nothing you’ve forgotten about that could be negatively impacting your situation.
With this information you can try out mortgage calculators to get an understanding of how much you’ll be able to qualify for with a new mortgage. Make sure to use the interest rate outlined in the Government’s new mortgage stress test rules. Your current debt load can have an impact on the size of your mortgage.
How to reduce your current debt
Reducing your debt load will be one of the most significant things you can do to improve your home buying power. For millennials, student debt may be a large part of your debt load, but focus on reducing unsecured debts like credit cards first. Try a debt repayment method like the debt snowball or debt avalanche, or seek professional debt help advice to tackle high-interest debts.
If you are finding it challenging to reduce your debt on your own, a Licensed Insolvency Trustee can explain all the options that can help you move towards becoming debt free. This can include budget advice, credit counselling, and debt consolidation. Debt consolidation might be a viable solution if you have a lot of credit card debt. A debt consolidation loan pays off multiple higher interest debts, while reducing your total interest paid. All beneficial things when it comes to qualifying for a mortgage because it lowers your debt-to-income ratio.
If you’re in the market for your first home, use the resources available from financial literacy websites to learn more about buying a home including home prices, mortgage rules, and your own debt situation. Total income is an important factor affecting your home buying power, but so is your overall debt load. And while you may not have the immediate ability to increase your income, you may be able to reduce your debt. Being as close to debt free as possible before you take on the responsibility of a mortgage is a good thing.
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