How to increase your affordability in the face of rising interest rates and high inflation

The Canadian housing market is looking a lot different these days than it has over the past two years. Some home prices have declined, interest rates are consistently rising and inflation continues to be a protagonist in our global economic story. The bidding wars, high competition and the red hot activity we were getting used to has slowed, and many Canadians are wondering what lies ahead.

Fixed vs variable rate – what should homebuyers choose?

Historically, most buyers tend to choose a fixed rate mortgage. Fixed rates give homebuyers more security in their budget as they are subject to the same monthly payment throughout the life of their mortgage term. Further, if rates go up, their fixed rate will not change. Nevertheless, a fixed rate borrower may not be able to save as much money as they could if they chose a variable rate mortgage and rates drop in the future. Given the state of the economy, it may be a time where homebuyers and owners consider shorter-term fixed rates of two or three years, with hopes that rates drop over the next few years as inflation decreases and the economy stabilizes.

In the last decade, variable rate mortgages have saved homeowners more money than fixed rates have, as rates have been dropping. However, in recent months, variable rate mortgages have gone up, as the Bank of Canada has been focused on reducing inflation. So, while many homebuyers and owners went with a variable rate mortgage over the last two years, given historically low rates, variable rate options may be of less interest to borrowers right now. It’s important to note that on a variable mortgage, you can switch to a fixed rate at any time. This could be a good financial move if fixed rates drop below your variable rate.

Where is the housing market headed?

Some prices are lower and buyers are showing interest, but many are waiting to see if they drop even lower in the winter months. From a seller’s perspective, some are worried about the current drop in prices and think the best course of action is to wait until prices rise again. This is mainly because Canadians have been so accustomed to thinking “home prices only go up.” However, it’s essential for sellers to understand that this may not be a short-term situation, and waiting may not be the best approach, as prices could drop even further.

Despite recent rate increases, the influx of first-time homebuyers and new immigrants is a driving factor in today’s housing market. These two groups of buyers are very eager to make their first home purchase in Canada, and our housing market is deemed more resilient as a result of their persistence. So, while the market has slowed due to interest rate hikes and price declines, there is definitely room for more activity in the coming quarters. This is especially true as sellers who were waiting to see if prices rise again realize that the waiting game may not be a good idea.

How to increase your mortgage affordability with rates rising?

With talk of another rate increase coming this fall, many prospective homebuyers are looking for ways to increase their mortgage affordability during this time. Here are a few ways:

Make a larger down payment

One of the key steps you can take to increase your mortgage affordability is making a larger down payment. If your down payment is below 20 per cent, you will be required to pay for mortgage insurance. This can add between one and four per cent to the price of your home, and decrease affordability. In Canada, every property purchase requires a minimum down payment, ranging from five to 20 per cent of the purchase price. So, if you increase your down payment to 20 per cent, you will not be required to pay mortgage insurance, and those extra dollars can be placed against your affordability.

Pay off your debt and keep your credit healthy

Your lender will look at your credit score and debt-to-income ratio to determine how large of a mortgage they will approve you for. For some, these can be the limiting factors in mortgage affordability. Your debt-to-income ratio shows lenders how much debt you can manage based on your current financial situation, and in the case of future financial difficulties or rises in interest rates. Some things you can do to improve your debt-to-income ratio and credit score are:

• Pay your bills on time and in full
• Avoid going over your credit limit
• Eliminate making large purchases on credit
• Pay off your debt sooner rather than later

Help from parents

More than ever before, parents are helping their children buy homes. This is not just first-time buyers, but for those buying their second home, too. This is often done in two ways: Co-signing, or a gifted down payment. Co-signing basically adds their income and debts to yours in the mortgage application to increase your total affordability. As many parents are mortgage-free, it is a major boost to affordability. It is important to understand, however, that this means that they are on title and liable for any missed payments.

A gifted down payment is an amount of money provided by an immediate family member to help with a down payment. This will, of course, increase what you can afford, as it’s extra money you can put down on your home. Additionally, if you move from an insured mortgage (with a down payment below 20 per cent) to one paid by the lender, this will also increase your affordability.

Most importantly, shop around for different lenders

Before making any big purchase, it’s always recommended to get comparables to ensure you’re getting the best price and value. The same goes when shopping for a mortgage. Most Canadians head straight for their bank, but there’s an entire market of lenders available who can shop around and help you find the best rates and most flexible products that may align better with your financial situation. Not only that, but shopping around can bring to light better mortgage features you would not otherwise have access to with a prime lender, including prepayment privileges and penalties, which could save you thousands of dollars over time. Surprisingly, some lenders will actually provide more mortgage affordability based on their qualification options, so that is another very important reason to shop around, as you could potentially afford more than you think.

In the face of inflation and consistent rate hikes, remember that buying a home is still possible. Taking the time to understand the various mortgage options available, improving your spending habits to save more and shopping different lenders are some of the key steps you can take to achieve homeownership, regardless of the market conditions.