Here are five strategies that can help you keep your peace of mind amid the uncertainty over the direction of the housing market.
1. Plan to live in your home for at least 10 years.
Housing forecasts range from a soft landing to a hard decline – and then there are the dreamers who believe prices won't ever stop rising. What all these views have in common is that they target the near to medium term. If you're planning to stay put in your current home for 10 years, you have a good chance seeing the market recover from any declines to come and begin the next up-leg. Warning: The Toronto market took a few more years than that to get back to its 1989 price peak. Then, however, it took off like a rocket.
Here's another good reason to live in a house for at least a decade. No matter what happens in housing, it's unlikely that prices will rise as they did in the past 10 years. You'll have to build equity the old fashioned way – by living in your house and paying your mortgage.
2. Make lump-sum mortgage prepayments.
Money you use to pay down a mortgage goes directly against your outstanding balance, which means it increases your equity and lowers your total interest cost. Adding to your equity is an important benefit at a time when the market value of your home could decline.
Don't feel discouraged if you lack the money for a big prepayment, say $1,000 or more. Most lenders allow "double-up payments," which means you can add as much as a whole extra payment in any month you want. Some will lenders allow a payment as small as $100. Still considering what to do with your tax refund? Put it right into your mortgage.
3. Save for a 20-per-cent down payment.
Tough to do, no question. The average Toronto home cost $526,335 in April – a down payment of 5 per cent would run you $26,317, while 20 per cent would cost a massive $105,267. The average national price was $380,588 in April, so a 20-per-cent down payment would come to $76,118.
One benefit of the 20-per-cent down payment is that you start your home ownership experience with a serious chunk of equity. If you go in at 5 per cent, a few bad months for the real estate market could leave you owing more than the market value of your home. One more benefit of a down payment of 20 per cent or more is that you save the cost of mortgage default insurance. The insurance premium is generally added to the amount you borrow, which means you pay interest on it.
4. Take a 10-year mortgage.
It's unlikely, though not impossible, that a 10-year mortgage at 3.69 per cent will turn out to be the lowest-cost option in terms of interest cost. Five year mortgages can be had for 2.79 per cent today, while a good one-year rate is 2.4 to 2.6 per cent. So why use a 10-year mortgage? To wall yourself off from the market for a full decade. If the economy surges and rates rise, you're covered. Same goes if the housing market tanks and lenders get nervous about their mortgage portfolios.
I wrote about something called renewal risk in a recent column you can check out here. Basically, it refers to the risk that a lender stressed by falling house prices might want to requalify you at renewal time to ensure your income and debt levels are in balance with what you owe. If not, you might not get a tip-top mortgage rate discount, or in an absolute worst-case scenario, have your renewal declined. (Let's be clear that you're only at risk if you made a down payment of 20 per cent or more on your home, which means mortgage default insurance wasn't required.)
Lenders now leave clients alone as long as they're making their payments on time, and some say renewal risk is way overblown. But if you have any worries about losing your job or having your hours cut back, a 10-year mortgage buys you some privacy. You won't have to talk to a lender until 2023.
Yes, it's tough to find decent digs in big cities, where monthly rents are high and units are scarce. But in Toronto, at least, a projected decline in the condo market would be good news for renters.
A serene outlook on housing comes from being prepared for all outcomes, from a soft landing to a sharp decline. Prepare your mind, and your mortgage.