Canadians have become accustomed to living with debt. It has become a way of life. It’s almost impossible for Canadians to not live with some form of debt. We use it to finance major purchases such as cars, education, and houses. One of the highest being mortgage debt. Buying a house is one of the biggest financial investments a person will make in their lifetime. Before, it used to be the biggest financial goal a person would have on their list. But that dream is slowly dwindling. According to a poll conducted by RBC, 36% of non-homeowners under 40 have given up on the dream of owning a home. This past year has presented a range of financial hardships not just within Canada, but globally due to the COVID-19 pandemic.
However, don’t give up on your dream of buying a home just yet. Just because you’re not sure if you can buy a house right now does not mean it isn’t possible in the future. If you’re worried that your debt is stopping you from potentially buying a home, we’re here to tell you that you don’t have to give up. Buying a house in Ontario is possible if you have debt, but the decision should come with a lot of financial consideration.
It’s possible to buy a house if you have outstanding debt, but is buying a home the right decision?
How will debt impact your mortgage application?
One of the most important aspects of your finance’s lenders will review is your debt-to-income ratio. A debt-to-income ratio (or DTI) is the difference between how much you owe in debt compared to how much of an income you make. This will be a big deciding factor for a lender when it comes to approving you for a mortgage or not. For most lenders, if your DTI is over 43%, you will likely not get approved for a mortgage.
The solution for this is to either find a way to make more of an income or to consolidate your debt to bring that DTI percentage down below 43%.
What about the repercussions of consolidating my debt?
The biggest worry our clients have about filing a consumer proposal or consolidating their debt is how it will look on their credit report. When you apply for a mortgage, a lender will see that you filed a consumer proposal – which tells your lender that you were unable to pay your debts in full. Does that look great on a mortgage application? Not exactly. But do you know what looks worse? Having a ton of debt, you are unable to pay off.
In this situation, the pros greatly outweigh the cons. You can easily rebuild your credit and your financial situation as a whole but holding on to debt is a much bigger burden to carry (and to get rid of). Let’s say for example you are working on getting approved for a mortgage, but you still have a few years of payments left on a new car you bought. In some situations, paying off the debt you owe on the car will help you out way more on your mortgage application than it would be to hold on to that debt.
What are the repercussions of buying a house when you still have debt?
Just as consolidating debt has its downsides, so does buying a house when you have a lot of outstanding debt. The important thing to remember is that everyone’s situation is different. Perhaps now is the time for you to buy because you found an extremely good deal for a property that you can’t pass up. Or maybe you’re no longer willing to spend money on rent, and you want to buy a property to start building equity. That’s all great, but always evaluate the pros and cons before making a big financial decision.
Let’s say you do get approved for a mortgage, but you do have a lot of debt to juggle as well. If you do buy a house when you have a lot of debt, these are some possible repercussions:
- Being house poor –You’re able to make the minimum payments on your debt and other loans but think about what that leaves you in the end. Will you still be able to live comfortably, or will you be directing your income solely to your debts? Are you still able to invest for your retirement? Don’t put your other financial goals at risk just to buy a house — It’s not worth jeopardizing your financial future just to buy a home. Sometimes paying off your debt and waiting a year or two is the best answer.
- You will receive a smaller loan – Consider how paying off your debts will impact how much you will get approved for when it comes to a mortgage. When speaking to a lender, they can show you the difference it would make paying off certain debts in comparison to the mortgage loan you might be eligible for. In most cases, the more debt you have, the lower the amount you would get approved for.
Make the right choice and make a plan to eliminate your debt with us today!
At 4 Pillars, we are strong believers that living a debt-free life is very possible. Why? Because we’ve seen it firsthand. We help our clients every day reach their goals of paying off their debts. So, before you jump into buying a house and piling on more debt, consider the power a debt relief plan can have. We can help you through the consolidation process and create a plan, built specifically for you, to give you the best chance at total debt relief. Talk with one of our debt relief specialists today at one of our 3 locations in Northern Ontario. You can reach our Muskoka & Parry Sound office at 705-640-0187, our North Bay office at 705-980-0158, or our Sudbury office at 705-806-1252. Stop letting debt control your life — take the first step today!