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What to do when you can’t afford that mortgage

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‘Tis the “mortgage season” and people have begun coming out of winter hibernation to begin the hunt for that perfect home. But affordability remains a challenge, especially considering that in January, the federal government made regulatory changes that have altered the playing field for Canadian home hunters.

Most notably, the maximum amortization on a Canada Mortgage Housing Corporation-insured mortgage decreased from 35 to 30 years. This means buyers hoping to minimize their regular payments by paying over a longer period will now have to manage larger payments over fewer years. Longer amortization periods reduce monthly payments, but increase the interest paid over the life of the mortgage, making it harder to build equity.

So, how do you afford a home now that your payments will be larger than for a 35-year mortgage? Here’s some simple financial help.

Track your budget

Knowing your monthly expenses and what you can give up to enable you to make your mortgage payments will paint a clear picture of the amount of mortgage debt you can handle. Be aware of what’s going out and coming in regularly, including debt obligations. A mortgage is a significant, long-term financial commitment and it’s important to first have your finances in order.

Talk to a good financial advisor

A good financial advisor will take time to understand your needs, wants and most importantly, your reality. As a neutral, third-party, they’ll draw on their expertise to analyse your financial landscape and determine what you can handle in terms of a mortgage, while ensuring you remain on track to meet your other financial goals.

Save, save, save

You may want to purchase that dream home today, but saving as much as you can towards your down payment will help you in the long run. The larger your down payment, the smaller your mortgage, which means less interest and smaller regular payments. Also, consider the Home Buyers’ Plan (HBP) if you’re a first-time buyer. The HBP lets you to withdraw up to $25,000 tax-free from your RRSP to purchase or build your first home. It allows you to benefit from tax sheltering while helping you with your down payment.

Hunt for the best rate

A lower interest rate will save you thousands of dollars over the long term. Crunch the numbers to ensure you can afford your payments based on current rates and future, potentially higher rates. This is particularly important in today’s market where rates are still low (and attractive) but may rise. Your credit score and debts affect your rate so work to keep the former up and the latter down so you’ll be in a strong position when rate hunting.

Sign up for what you can afford

Unless your uncle is Donald Trump, mortgages are a significant financial responsibility, even under the best of circumstances. Ultimately, it’s up to you to ensure this financial weight is manageable. Even if you qualify for an $800,000 mortgage over 30 years, you don’t need to use it all if the monthly payments are going to strain you. You may need to wait a little longer to buy that perfect home. But you would have made a smarter decision in the end.

Kathy McGarrigle serves as Chief Operating Officer for Coast Capital Savings.

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