Financial experts and government ministers have been going back and forth in recent weeks over whether to slow Canada's booming housing market, and what the best approach might be to reign in debt.
One of the biggest proposed changes to the housing market, championed by Toronto-Dominion Bank's chief economist Craig Alexander, has been stricter guidelines for mortgage borrowing. Alexander and others want Ottawa to further raise the minimum required down payment from 5 to 7 percent, lower the maximum amortization from 30 to 25 years and impose means testing on would-be homebuyers to ensure they can afford their mortgages.
A new survey, however, suggests that many first-time homebuyers are already in good financial shape, and that they are the ones driving the current housing boom. Roughly 43 percent of Canadians who purchased a home in the last two years, or who intend to purchase a home in the next two years, say their finances are doing well, according to the joint Genworth Canada, Canadian Association of Credit Counselling Services survey.
Not only that, but nearly two-thirds say they enjoy planning their financial futures. And when it comes to saving for a down payment, 59 percent of Canadians reported it took just two years to accrue the money they needed. Nearly all of those surveyed – 94 percent – said owning a home would be worth the effort, and would provide a greater sense of emotional well-being and security.
"It's easier to achieve homeownership when you have healthy personal finance skills," said Henrietta Ross, CEO of CACCS. "The survey results reaffirm our strong belief that getting your financial house in shape is the first step [toward] a life of financial fitness and overall well-being."
With so many first-time buyers in good financial shape and looking for a house, there are a few things to consider when searching for home loans. Affordability is arguably the No. 1 most important factor, suggests M&I, a branch of BMO Financial Group. A good rule of thumb follows that total debt, including mortgage debt, shouldn't exceed 40 percent of household income. A mortgage broker can help homebuyers find the best mortgage rates, which can help keep monthly payments down.
A shorter amortization period, like the one proposed by Craig Alexander, might mean slightly higher monthly payments, but homeowners can save tens of thousands of dollars in interest payments over the life of a loan. One BMO analysis points out a $400,000 loan at 5 percent interest with a 25-year amortization, rather than the current 30-year standard, will reduce long-term costs by up to $70,000.