Overview and Tips on Getting Pre-approved for a Mortgage
My goal is to help you realize your dream of owning a home! This is a decision that requires a lot of research and insight, and I am here to provide you with the right tools to succeed.
This is Part 6 of a 11 part series that I will share with you weekly. If you want to read the previous step, please click here.
6. Get a Little Help From Friends and Family
Alright, so we’ve considered some options to save money and reduce the cost of your first home, but what if you still don’t have enough money for a down payment? The next few steps are going to consider some alternative options to help you out. One of the most common approaches is to get a little help from your parents, or friends and extended family. While it may feel a little uncomfortable to ask for help, some agents have reported that close to half of their first time home buyer clients are receiving help from parents or grandparents. What’s more, a recent survey found that around 90% of parents would be willing to help their kids pay off debt if their kids asked for help. This is a good sign that we’re going in the right direction. When it comes to getting a little help, this can come in two forms: either getting help with your down payment through a gift or friends/family loan, or getting someone to co-sign for a loan. Naturally, getting help with a down payment comes into play when you don’t have enough money saved up. This can also be a good direction to go in if you have enough to buy a home, but not enough to buy the home that you need. Co-signing on the other hand, is useful when you have enough saved up for a down payment, but you don’t make enough money for the bank to be willing to extend the size of mortgage you need. As an example, let’s say you are hoping to buy a home for $500,000, but you’re only approved for a $300,000 mortgage. Having a cosigner can help to increase your mortgage approval. These steps can be taken separately or together, depending on your needs.
If asking for help is an option, but you’re still considering just waiting to save up more, here are a couple of reasons to reconsider. First, you should keep in mind that, for most people, property appreciation tends to outpace your ability to save. According to one article, between January 2020 and January 2021, average benchmark detached single family properties in Victoria rose in value by about 11.09%. While one could argue that this appreciation has been unnaturally high due to Covid-19, prices prior to Covid-19 rose from $625,700 to $756,000 between January 2017 and January 2020. That’s just over 6.5% per year on an annualised basis. By comparison, Statistics Canada reports that the average net savings for all Canadian households was a mere $852 in 2018. Even if your household brings in $93,800 and saves an impressive 20% per year, that’s just $18,760. However, if we apply a 6.5% appreciation rate to a home priced at $943,000 over the next year, that would produce a housing cost increase of $61,295! Even if we were to rewind the clocks back to January 2017 and apply the same annual appreciation rate, that would have still been a housing cost increase of $40,671. This is still a net increase to your cost of property purchase of $21,911! In brief, waiting to save up more can sometimes end up costing you more money, so from a cost perspective, if you can get a little help from friends or family to get into the market sooner, it is often the more prudent option in a risking market.
Beyond saving money, finding creative ways to get into the market sooner also helps you build up equity and save for your financial future. First off, it’s already a given that you stand to benefit from those same appreciation gains that were previously working against you when you were just saving. Based on previous numbers, if you were to buy your first home today for $625,700, an average annual property appreciation rate of 6.5% will increase your property value by $40,671 during the first year of owning a home. In addition to that, assuming a down payment of 20% and a mortgage interest rate of 2%, you would be able to pay $15,608 into the principal of your new home during the first year. So, simply getting into the real estate market just one year sooner could mean a net benefit of $56,279!
Now, some people will ask: “what if the market drops”? Others might even confidently proclaim that they’re actually waiting for the market to drop before they get in. While this may seem like a clever approach at first, I would caution two considerations before following suit. If you’re planning to time the market, first ask yourself: “when will the market actually drop”? Second, ask yourself what the odds would really be of the market dropping in any given year? If you can’t answer the first question with certainty, you’re not alone. There’s an old saying that top economists have predicted 11 of the last 7 market crashes. In other words, even the most qualified among us can’t get it right, so what chance do the rest of us have? This brings us to our second question, what are the odds of the market dropping in any given year? While no one can ever know this with certainty, the historical trend for real estate is typically upward. This is especially true for the Victoria real estate market. However, for sake of argument let’s say you were unlucky enough to buy a house at the peak of the biggest housing crisis in recent history, the 2008 housing crash. According to the Victoria Real Estate Board (VREB), the average price of single family properties continued to rise every year from $565,900 in 2007 to $629,900 in 2010. Talking to a long time local real estate professional, I received a more conservative estimate that some properties dropped by as much as 10% or $50k between 2007 and 2009. While this may sound like a scary proposition, even with this estimate in mind, those properties that lost value due to market fluctuation were able to rebound to their 2007 price levels by 2010. By 2017 average prices grew to $859,871, which means that if you’re planning to buy and hold for the long-term, staying out of the market can actually be a bigger financial risk than getting in.
Stay tuned for part 7!
I am a Victoria based local realtor with eXp Kiteke. My commitment to honesty, integrity, loyalty and hard work have been important pillars for me because they drive a high standard of excellent service for my clients. Helping you realize your dream is my goal!
I service Vancouver Island, but my focus is on: Victoria, Sooke, Saanich, Malahat, Shawnigan Lake, Cobble Hill, Duncan, and the rest of the Cowichan Valley.