Home Buying and Mortgages
Saving to buy a new home in Alberta
By ATB Financial 25 July 2019 5 min read
Buying a home during a sluggish period in the housing market might seem like a gamble, but it may be smarter (and easier) than you think.
Albertans have been through challenging times over the last few years. After the drop of global oil prices in 2014 and the devastating May 2016 wildfires in Fort McMurray, the economy has seemed slow to recover. After a temporary nation-wide spike in home sales in 2017, the Albertan housing market is struggling once again, with resales, new home builds and prices all on the decline.
Though the economy has slowed, economists have a positive outlook for our province’s future. And despite the economic downturn, purchasing a home in Alberta is still not as daunting as it may seem–in fact, because of factors like competitive pricing and higher supply, buying during a market lull might make a lot of sense. Regardless of when you decide to take the plunge, purchasing a home is one of the biggest financial decisions you’ll ever make. Here are some current factors to consider as you save to buy a home in Alberta.
Lower demand means lower prices
According to a report by the Alberta Real Estate Association, falling oil prices and resulting economic uncertainty in 2018 contributed to Alberta’s lowest home sales numbers since 2010.
But in spite of other economic difficulties Albertan families may be facing, increasing home purchase prices are not one of them. In fact, the average price of buying a home in Alberta declined by almost three per cent between the end of 2017 and the end of 2018. In some areas, the difference is even more dramatic; the Realtors Association of Edmonton’s first quarterly report for 2019 notes that “the average price for single family homes absorbed in Greater Edmonton decreased in February by almost 6 per cent year-over year to $542,257.”
Part of the reason prices haven’t fallen even lower (which might be a sign of an unstable market) is the fact that builders are adding fewer homes to the market. In other words, the number of new houses being built is (roughly speaking) keeping pace with the reduced demand, which has kept prices consistent. While the trends in new apartment builds and other forms of unit housing are less conclusive, construction of free-standing houses has been on the decline for several years now.
Stricter rules to play by
One thing that has made buying a home in Alberta more challenging is the mortgage stress test instituted by the Canadian government in January 2018. Ultimately, the mortgage stress test is intended to protect home buyers from the rising interest rates that tend to define a slowly-but-steadily improving economy. According to a February 2019 article in Maclean’s, the Bank of Canada has been driving up interest rates since the spring of 2017. The test requires home buyers applying for both insured and uninsured mortgages to qualify at interest rates that represent projected rate increases and are actually higher than the current interest rates a buyer might start out paying.
At its most effective, the mortgage stress test mitigates the threat of disaster that rising interest rates can mean for potential home buyers. After all, qualifying for a mortgage at a higher rate than you actually have to pay means that if and when the rate does go up, you’ll still be able to make your payments. However, it’s undeniable that the extra income it takes to pass the test means that some would-be buyers are now excluded from the market.
With both the mortgage stress test and rising interest rates to keep in mind, it’s more important than ever for home buyers to understand the relationship between the size of their down payment, the terms of their mortgage and their mortgage interest rate. While it’s safe to say that a larger down payment is going to save you money in the long run, deciding when to stop saving for a down payment (possibly while still paying rent) and start paying down a mortgage is a complex one. Your best bet is to talk to a mortgage specialist about how to maximize your down payment without jeopardizing your goals or your quality of life.
Here are a couple of different avenues you should consider when assembling your down payment:
Take advantage of the Home Buyers’ Plan
The Home Buyers' Plan (HBP) is a government program that allows you to withdraw up to $60,000 in a calendar year from your registered retirement savings plan (RRSP) to buy or build a qualifying home. You can use the HBP to purchase a home for yourself or for a related person with a disability. To be eligible for the HBP you must be a first-time home buyer and have a written agreement to buy or build a qualifying home for yourself or for a related person with a disability. You must also live in the home for one year after buying it. Learn how to withdraw funds from RRSPs under the HBP.
Investing to save for a down payment on a new home
If you’re saving for a down payment, putting that savings in an RRSP will allow you to take advantage of the Home Buyers’ Plan. With this plan, you can focus on putting as much as you can afford into your RRSP and benefit from the RRSP tax deferral, ultimately increasing your tax refund and allowing you to save even more.
If you employ this strategy, make sure you speak with a professional to make sure you’re invested in the right product for your preferred level of risk and how many years you have before you’ll want to withdraw the funds from your RRSP. (With some investment vehicles, such as many GICs, your money has to stay invested for a certain amount of time before you can take it out—even as a down payment.)
An important factor to consider is your timeframe. If you think you could save enough for a down payment in less than two years, you should use a savings account—ideally a TFSA or a savings account within an RRSP. If it will take you two to five years, investing in conservative mutual funds through your RRSP may be a better option. You can get more information on this and professional guidance by speaking with an ATB financial specialist.
When in doubt, talk to a professional
No matter how you’re choosing to save for a home, when it comes time to make your purchase make sure you have all the available information and someone to help you understand it and use it to your advantage. Mortgage specialists at ATB Financial keep a close eye on mortgage interest rates and the local and national economies. Consulting with a professional will ensure you find the best mortgage for your specific needs at the best available rate.