As we head into the spring real estate market, many Canadians are sitting on the sidelines instead of jumping in. Part of the reason is the mixed messages in the media: some experts call the Canadian housing prices a bubble, yet the real estate industry say prices are stable and it’s never been a better to time to buy. As if that’s not enough to boggle potential buyers, this month the Bank of Montreal upped the stakes by offering a five-year fixed rate mortgage of 2.99 percent, making monthly payments temptingly low — and potentially spurring a price war between lenders. If you’re thinking of buying a new home, let me help you cut through the noise a bit. Sure, it’s important to consider the low rates, but consider these basic tips to help with your decision:
1. Buy a place you’ll stay in
This market is no place for house flippers. Even as some people are calling for home prices to drop, many believe that the days of double-digit annual price gains are gone. If you’re planning to buy a home, make sure it’s a place you want to stay for the next five years at least – otherwise, you could end up losing money when you sell (not to mention eating all those extra closing costs).
2. Don’t use your emergency fund
Do you have a rainy day fun you can count on to fix your car or cover an unforeseen expense? If you’re buying a home, your emergency fund will be more important than ever because it’s you, not your landlord, who has to pay to fix the plumbing, the leaky roof etc. And, if you don’t have an emergency fund, then maybe it’s not the right time to be dropping all your savings on real estate.
3. Make sure you buy something you can afford – comfortably!
You might be excited to find out that your mortgage lender is ready to lend you hundreds of thousands more than you think you can afford. But don’t be fooled by the numbers – make sure you can easily afford not only the mortgage payments but also the taxes and maintenance costs of your new home. And make sure you build in an extra cushion in case interest rates go up – they will rise at some point.
4. Make sure you’re buying for the right reasons
Are you a happy renter, but think you should invest in property? Are you trying to keep up with your friends? These are not reasons to jump into the housing market. Ignore the noise and focus on what is right for you and what you can afford. There is no shame in renting – instead, use your savings to build a tidy portfolio of stocks and bonds you can sell when and if you need to.
5. Take advantage of those low rates
Finance Minister Jim Flaherty has warned Canadian banks about starting a mortgage war – but if you’re able and willing to buy right now, then low rates can be your friend. The trick is to pay off your mortgage as quickly as possible. If you can lock in at a low rate and choose a shorter amortization (say, 10 years) then you can really make those rates work for you.
6. Shop around
And I don’t mean for a house. Make sure you’re getting the lowest mortgage rate possible. It’s never been easier – go online (i.e. ratehub.ca) or find a mortgage broker to get a much better deal than you can find on your own.
Money expert Caroline Cakebread has been writing for Chatelaine.com since 2006. She is a recovering academic and the mother of two small kids. She lives in Toronto where she writes and reads about all things financial. Follow Caroline at Twitter.com/ccakebread.