Buying a house in today’s market can feel overwhelming and frustrating, yet filled with so many challenging and exciting moments that it sometimes feels like an adventure novel. Once your transaction closes, however, nothing compares to the feeling of pride and joy when you turn the key on the front door of your new forever home. A moment of sheer triumph!

The current market is anything but simple, and your excitement may be mixed with a certain degree of uncertainty. At the back of your mind, you may be asking yourself, “What if I can’t afford this?” In this post, we’ll talk about mortgages, interest rates, and other costs to expect so that nothing can steal the joy of purchasing your new home.

Housing Affordability: Do the Old Rules Still Apply?

Traditional wisdom states that your housing costs should be a maximum of 30% of your gross income to be considered affordable. That has been the norm for years. If you can stay within that guideline, fantastic! You likely don’t need to worry about being unable to cover your costs unless something drastic changes in your life.

However, with the recent upward pressure on the price of residential real estate, it’s becoming an impossible standard for many potential homeowners. The question now is whether that old rule still applies. For many financial analysts, the answer is up for debate. 

In light of soaring housing prices, high interest rates, and inflation, achieving the 30% rule is simply unattainable for many people, whether buying or renting. The new reality is that everyone must carefully allocate their funds to what matters most. 

• When buying a house, the less debt you have, the better as this frees up more of your income to put towards your mortgage.
• Saving as much as possible for your down payment will also help. The less you borrow, the lower your payments will be and the less interest you will pay. If you can put down 20% or more, you will also save on mortgage insurance.
• You will need to pass a stress test to qualify for a mortgage in Canada. This ensures that you can continue to afford your home even if interest rates rise, presuming your income and debt ratios stay the same. If you’re unable to pass the test, your options are to increase your down payment if you can or look for a less expensive home. Alternatively, you can work to decrease your debt load and improve your credit score.

These guidelines may seem stringent; however, they are in place for a reason, so you will never wake up at three in the morning stressed about whether you can cover your mortgage this month.

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Thinking of buying a home in Ottawa in the current real estate landscape? The resources below will help you navigate the market:

• Should I Gift My Child a Down Payment For Their Home?
• Should I Buy an Investment Property Now for My Kids in the Future?
• Does Real Estate Protect You Against Inflation?

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Contending With Rising Mortgage Rates

Those buying a home in late 2022 and throughout 2023 faced affordability issues, not just because of high prices; rising interest rates and soaring inflation also added to the mix, and many buyers decided to step back for the time being.

Others, determined to purchase a house, reprioritized their budget, essentially doing whatever it took to make it happen. Whenever you can reasonably afford to get into the market, it’s always better to do it sooner rather than later. 

High interest rates may be painful, but are not always a reason to avoid buying. Since real estate values tend to rise steadily over the long term, owning a house is a great investment, both financially and personally. 

Remember that rates are temporary, but your house is forever. And if rates drop after your purchase, it may make sense to look into refinancing your mortgage. 

Want to see how much you can afford at various interest rates? Our buyer calculators can help you determine a comfortable budget. 

What if the Worst Happens?

No matter how secure you may be, misfortunes can happen to anyone. A job loss, illness, or sudden expense can cause financial struggle. If you have a co-signer or guarantor on your loan, they will be expected to take over your payments if you cannot. Otherwise, you will need a plan to protect your financial interests. 

First, you want to be proactive – do not wait until your lender takes action. If you take the initiative, and reach out to your lender they are more likely to be open to working out a solution. For example:

• Your lender may allow you to defer your mortgage for a month or two until you get back on your feet. 
• You may be able to pay a reduced amount for a short time.
• Extending your amortization period may be an option.
• Your lender may allow you to add any missed payments to the balance of your mortgage.

If you do miss a mortgage payment, you’ll usually have a 15-day grace period to allow you to catch up. Otherwise, your lender will consider you to be in mortgage default and may over time pursue a Power of Sale or even foreclosure. These procedures are long and involved, which means both parties will benefit by working out an arrangement. 

In the worst-case scenario, selling your home before you reach this point may allow you to salvage your equity and credit rating. Downsizing to buy a smaller, more affordable house is far better than losing everything to foreclosure! There are also other options that we can help with.

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If you decide to sell your home, getting the best possible results is critical. The posts below will help:

• You Only Have One Chance to Make a First Impression
• How to Sell Your Ottawa Home When You Have Kids or Pets
• Can I Use the Same Ottawa Real Estate Agent to Buy and Sell?

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Saving for a Rainy Day

When it comes to mortgage affordability, prevention is the best medicine. The first step is to work with a real estate agent who will help you find and secure a home comfortably within your budget. Secondly, building up an emergency fund will help to ensure you never have to worry about falling behind. 

If your finances are currently strong, set aside a portion each month before splurging on any luxuries, vacations, or other non-essential expenses. It doesn’t mean you have to do without. 

However, having a financial cushion will save you a world of stress when challenging times arrive. If you never have to use it, even better! You will still enjoy the peace of mind that comes with knowing there’s enough in the bank to cover you no matter what happens.

Do you have questions about buying a house in Ottawa? We are here to help in any way we can! Reach out to mail@chellteam.com or call 613.829.7484 to begin the conversation today.