Despite fears that a generation of new homebuyers might be forced from the market due to rising costs of ownership, the percentage of Canadians who own their homes has remained fairly steady over the past decade. According to Statistics Canada data from the 2016 Census, more than 9.5 million of the 14.1 million households in Canada owned their home, representing a homeownership rate of 67.8%. In 2006, the rate was 68.4% and in 2011 it was 69.0%.
Know the Risks
Prospective home buyers can get into the market with very little cash on hand – though purchasing without a down payment comes with a high risk factor. If you’re willing to accept higher interest costs, you can even borrow your down payment from a private lender such as a line of credit, personal loan or even a credit card. This, however, is like stacking a loan on top of a loan!
Prepare to Save
The better your creditworthiness, the better the terms of loans and mortgages will be – but having lower than average credit is not necessarily the death knell for your dreams of home ownership. It may, however, be more challenging to meet the savings goals for important elements of the process such as your down payment. Generally speaking, the worse off your credit score is, the larger a down payment you may have to make, up to as high as 20% of the value of the home. You’re incentivized to take the time to build a savings plan that will allow you to afford this payment without crunching down on the rest of your financial health, which has follow-on benefits, too. Namely…
Take Your Time to Rebuild
When searching for a mortgage, lenders will be more inclined to work with you at more favourable rates if you take the time to improve your creditworthiness. This process dovetails with the progressive work toward savings goals that you may need to make a down payment that is large enough to offset somewhat meaningfully against the payments over time that you will be making on your mortgage, including its interest. A larger down payment also means your mortgage payment period will be shorter, or you could choose to make smaller payments, amortizing your high-risk mortgage over a longer period of time. Owning a home may look like a singular goal, but it works best as the culmination of all your other efforts to better your financial health.
Consider Other Resources
First-time buyers can borrow up to $25,000 from their Registered Retirement Savings Plan as a down payment on a home. But this is a very different kind of loan, for three reasons:
- You’re borrowing from your own retirement savings, as opposed to a third party.
- You don’t have to start repaying the loan until the second year after the year you make your withdrawal.
- Even though Revenue Canada wants the funds paid back in 15 annual instalments, lenders don’t include those repayments in a borrower’s debt calculations. As a result, some people get approved for a mortgage only to find themselves caught in an annual cash crunch because they didn’t budget for their HBP payment.
The decision to borrow from an RRSP comes with other perils. By draining your retirement savings, you risk losing years of tax-deferred investment gains. That’s a decision that some will later regret. Moreover, any instalments that aren’t paid back on time are taxed as income in that year. And as many as one-quarter of HBP participants have missed or underpaid their instalments in the past.
Tread Carefully, No Matter What You Choose
Because buying a home is such a huge financial commitment, it’s vitally important to be in the best financial shape that you can be before putting down the cash (or the debt) to become a buyer. Patience and careful planning are your best friends, as are consultations with professional advisors. While you absolutely can consider buying a home with poorer than average credit, the financial obligations you may enter into as a result could have a foundation-shaking effect on your future. It’s almost definitely worth the effort to do as much improvement and preparation as you can before embarking on the journey to home ownership.