A surprising trend is occurring in the Toronto real estate market as rising home prices and interest rates impact affordability for first-time buyers. Instead of feeling priced out of the market or choosing to sit on the sidelines, some first-time buyers are actually going bigger and purchasing their forever homes first. Although this might sound a little bonkers, it’s a strategy that could work. How? Going for the big one could avoid being priced out of your forever home in five years when you’ll likely see a market where selling your starter home won’t cover the down payment for your forever home. Let’s look at whether this strategy is madness or pure genius.
The Fine Line Between House Poor and Financial Security
Ramping up your first-home budget to purchase your forever home can lead to a terrible situation: Being house-poor. This is never a good thing, leading to ongoing stress, fear of losing your home, a budget stretched beyond any human’s capacity, and the increased risk of getting further and further into debt.
Being house-poor has long-lasting consequences, including not having enough money to retire, dipping once too often into your home equity so you can never sell without being underwater, living a life devoid of any joy, and not having enough money to cover emergencies like a broken furnace, leaking roof or dead car motor. Not pretty.
The bright side: You pull it off and enjoy the bliss of financial security in a large, future-friendly home and never have to sell or move.
How do you know when a house is “The One”? Read our blog about finding the perfect Toronto home for your family right here.
The Stress Test
The only way to avoid being house-poor is to ensure you can afford the home you purchase. You’ll have financial security building equity instead of barely scraping together enough money to pay your mortgage and cover monthly expenses. That, as it often does, brings us to the stress test.
If you’re buying a home, hopefully, you know what the stress test is. But to review, lenders use a stress test to fathom whether you can manage your mortgage payments, not just based on today’s interest rates but potential rate increases in the future. We’re seeing how high interest rates are impacting many homeowners today. Although we’d like to think things can only get better, that doesn’t change the fact that the numbers are challenging even for those earning an income considered “enough” to afford purchasing a home in TO.
Lenders base the test on a qualifying mortgage rate of 5.25% or whatever contract rate they offer you plus 2%, whichever is higher. Since interest rates are above the qualifying rate, you’re looking at interest rates as high as 8% to pass the test. The bank looks at what your monthly mortgage payments would be at this rate and balances this with your income and monthly expenses to consider if you can carry the mortgage payments.
Get more insights on buying a home in Toronto with these posts:
- How to Buy a Home After a Divorce
- Should You Buy a Toronto Tear Down
- The Truth About Timing the Market
The Real Numbers
Now, before approaching the bank, we always suggest our clients take a long, hard look at their finances without trying to factor in what they’ll “give up” to afford a home. This is very important because if you’re already considering the things you can live without, chances are you probably shouldn’t be purchasing a home.
Use precise calculations and actual numbers for your income and expenses to understand your budget. For example, we see people balancing their budget based on something they expect to happen “soon,” such as paying off a loan, getting rid of their car, or that “big raise or promotion” they are due. This doesn’t work. You need to look at current numbers. As for those hopeful numbers, they’ll become gravy if and when they occur.
The other thing we tell clients to consider is savings. It’s not enough to break even once all the basic calculations are done. Owning a house costs money because you no longer have a landlord footing the bill to fix the plumbing, repair the roof, or replace broken appliances. You also have to consider other possible issues like car repairs or medical expenses not covered by OHIP. Ideally, you’ll need to put aside the following:
- At least 5% of your monthly income for your emergency fund
- 10% of your income towards retirement
- 3% for your kids’ education (if you have kids)
We haven’t even factored in things like vacations, your favourite Friday night bottle of wine, and those spa days you can’t live without. We hate being too doom and gloom about things, but we want you to avoid financial insecurity because you bought the wrong house.
After taking all of this into consideration, take those numbers to a financial advisor, discuss them with a real estate agent (we’re always ready to help), or speak to your bank to see if you can come up with a plan that makes your budget feel less depressing and more hopeful!
Looking to buy a home in Toronto? Find out the top 10 things you should look for in a real estate team here.
8 Strategies to Achieve Your Goals
That brings us to the more positive side of things. Once you figure out your finances, we have eight strategies that can help you achieve your home ownership goals:
- Side Gigs and Better Jobs
Since a stable income is the key to financial security, consider how you can up your cash flow. Today, there are more avenues than ever to help elevate your position and create your own opportunities. You can either look for a side gig like buying old clothes at consignment shops and selling them online, affiliate programs working with sites like Amazon, or carving out a niche for yourself using those mad baking skills to create custom cakes on the side. You may have the skill and experience to take on some freelance work, writing, blogging, designing, crunching numbers, data entry, etc. Or, let’s face it, if you’re up to it you can apply for part-time work at your favourite retailer and enjoy the discount to boot. You can also consider online courses to help improve your skills and find higher-paying job opportunities.
These aspirations provide more income, look better on paper, and avoid finding yourself on the brink of financial destruction when the bills are due.
- Pay Down Debt
If you’re in debt, pay it down before even thinking about buying a home – any home. This will improve your credit rating, reduce monthly expenses, and generally feel darn good!
- Save
Instead of thinking of cutting back when you buy a house, start doing it now. Find ways to slice off all the extras you love and start living lean and mean. The more costs you can cut out of your monthly expenses, the more you can save. The higher your down payment and the better your savings post-home purchase, the better off you are financially, and the easier things are as a forever-home homeowner. It might also set a new lifestyle budget that works, and you can continue to enjoy living on a lower budget and stop being so splurgy.
- Sell Stuff
This isn’t quite a side gig, but it’s gig-ish. Consider all your stuff and look for opportunities to sell the things you no longer need or can live without. When did you last throw your lipstick and cell phone into that Chanel purse when heading out? Do you really need a car, or at least such a fancy car? What about that sick fat bike you no longer use? There are tons of sites that allow you to sell stuff online and make some extra cash. It’s also a great way to declutter to make your move easier!
- Bank of Mom and Dad
This can be awkward, but many millennials are doing it. If your parents aren’t struggling financially, consider asking them for your inheritance in advance or see if they would be willing to pitch in, co-sign your mortgage, or lend you money towards a down payment. A loan should be formalized to ensure you pay your parents back. Just saying. Be sensitive to your parent’s needs as you might think your parents are well off when they are silently struggling to make ends meet.
- Relocate
Ontario is currently experiencing a mass exodus, with people seeking the good life in other provinces in the Maritimes or out west in Alberta. If you WFH, this could be an excellent opportunity to own the home of your dreams. You can also think of moving far from the city and purchasing a less expensive home within Ontario.
- Find a Roomie
If your home has a spare room, consider taking in a roomie. You can charge them rent to help offset your expenses and build your savings.
- Invest in a Home with a Rental Unit
Consider shopping for a home with a rental unit. You can earn more income by renting out the main house levels and taking the basement yourself. Once you help reduce your mortgage, you can take over the whole house, or use the rental unit for your aging parents.
Although buying your forever home first isn’t right for everyone, there are ways to make it work. Speaking to a real estate agent and your bank is a great starting point to help devise a plan that works for you.
Call The Christine Cowern Team at 416.291.7372 or email us at hello@christinecowern.com with any questions you have about Toronto real estate. We’d love to work with you!
