Columnist image
Pattie Lovett-Reid

Chief Financial Commentator, CTV

|Archive

Roughly half a million first-time homebuyers are living close to the margin and could be in a dire financial situation when interest rates go higher. 

However, mortgage industry veteran Will Dunning argues threats of higher interest rates have been echoed since 2008 -- and rather than going higher, they have actually fallen. 

New homeowners have a fear of being left out. They are often young, in entry-level positions and in many cases have taken on more mortgage than they can handle. Often overlooked are the costs beyond the down-payment that stretch first timers. In fact, property taxes and insurance have a tendency to go up every year while in a tough economic environment your salary may not. Even if you could afford things when you moved in, you need to ask yourself if you’ll be able to afford the increasing costs later.

What happens if homeowners face the perfect storm?  I'll use an analogy here: pilots fly from Point A to Point B; but what happens if the skies dictate Point C is is required? I've never met a pilot who doesn't have an alternate route planned before they take off. I believe first-time homeowners need a contingency plan before they jump into the market; unfortunately, too many only see sunny skies ahead. 

The markets are heating up and not just in Toronto and Vancouver. The term bubble is being used freely and the one thing we know for sure is that there has never been an asset class that has been on a one-way trajectory. 

So how do you deal with the potential of a bubble bursting and some of the air coming out of the housing market?  Here are a few strategies:

1) Spending all or most of your savings on the down payment and closing costs is one of the biggest mistakes first-time homebuyers make, especially in this kind of market. Scraping all your money together to make the 20 per cent down payment so you don’t have to pay for mortgage insurance may be picking the wrong poison.  After all, nobody wants to be stuck on the brink of financial ruin when one of life's surprises (like anything from unemployment to a leaky roof) happens.  I would consider taking out mortgage insurance and pay a little more for peace of mind. 

2)  Aggressively build up your emergency fund before you consider paying down your mortgage. Tuck small amounts of money away by living below your means. Being a homeowner means a lifestyle change for many. That isn't a bad thing, but a necessary strategy. Gone are the days of frequent trips, dinners out and senseless spending. Build up an emergency fund to cover off six months of living expenses; and, while you're at it, apply for a credit card that you don't use but is there in the case of an emergency. When you need one you may not qualify for one. 

3)  Pay down the mortgage before saving for retirement. The surest way to build your balance sheet is to pay off debt.

4) Talk to your parents. The Bank of Mom and Dad may be able to bridge you through a difficult situation. Be prepared: they may decide to take out a second mortgage on your home, advance a portion of your inheritance, maybe consider an interest-free loan. The point is the conversation happens before a backup plan or contingency plan needs to be called on. 

Bottom line: Knowing your Point C needs to be determined before you sign the mortgage -- not after.