It’s More Important Than Ever: As you know, the internet can be a great source of information. Some buyers though are too anxious to start looking at homes without confirming what they can afford with a lender. And with today’s mortgage stress test, the need for a buyer to confirm their mortgage affordability is more critical than ever before.
Don’t Assume Affordability: In one such case, a young couple assumed they could afford their desired price range in spite of the salesperson’s encouragement to obtain a pre-approval. So they viewed some ten homes and signed a purchase agreement conditional on obtaining a mortgage and a home inspection.
Stress Test Failure: After meeting with their lender they were told they did not qualify for the price of the home they were buying. Though they did qualify based on the current mortgage rate, they failed the stress test. Such an occurrence affects about 18% of prospective buyers today. They would have to reduce their expectations by about $30,000 to buy or increase their downpayment.
Other Possible Measures by the Salesperson: As well, the salesperson, against his better judgment, was influenced by their confidence, enthusiasm and motivation to buy. He also did not want to lose them as a client. He might have taken one more step though and suggested that, though he cannot pre-approve them, he can certainly run through the same exercise a lender uses to find out what buyers can qualify for based on their income and debts.
Opting to Wait and Improve Downpayment: The couple was initially upset with the bank but mostly at themselves. They felt the salesperson had done a good job and admitted they should have followed his advice before proceeding. Because of their let down, they decided to put a hold on buying. They did not want to reduce their expectations on the home they wanted. They wanted to save a larger downpayment, about $20,000 more, which they determined would take about two years at a savings of $10,000 per year.
Why it is Better to Buy Now: Yet buying a lower-priced home today might turn out to be the better strategy, and here’s why: According to the latest statistics, the average house price across Canada has risen by about 6.2% per year for the last 20 years. As an example, barring a downturn and if things remain equal, a $300,000 house today would potentially be worth around $338,000 in two years.
How Equity Can Increase: If the buyers purchased a home at a lower price today of $270,000 to qualify, after their downpayment of $30,000 they would have a mortgage of $247,440 with CMHC insurance of 3.10% added. Given the 6.2% average annual increase, this home might be worth about $304,500 in two years. That’s a potential gain of $34,500. As well, if they paid down the mortgage by the $10,000 per year they planned to save, their equity would increase again by $32,738.
Their Total Equity: They would then have the following equity: the original $30,000 down, the capital gain of $34,500, plus an additional $32,738 from reducing the mortgage principal. That’s a total of $97,238 allowing them to buy a better home in two years. It’s worth pursuing.