How to Navigate High Interest Rates and Still Afford Your Next Home

Climbing your way onto the property ladder is no easy task. Homeownership is one of life’s major goals for many people. It provides a level of stability that renters don’t typically get to enjoy, and instead of paying your landlord every month, your mortgage payments help you build equity in the biggest asset you’re likely to ever buy in your life.

High home prices have made buying your first home quite the challenge. A few decades ago, home prices entered a long slump that lasted from 1989 to 2002, where home prices were relatively stable, and wages climbed. That’s changed rapidly with the turn of the millennium, and home prices have quickly outpaced wage growth.

While markets have slowed down and even shown price declines, interest rates today have climbed higher than they’ve been in decades. It can change the math when it comes to your mortgage payments.

These strategies can help you tackle high-interest rates and high home prices when you’re looking for a house for sale.

#1 Save a Bigger Down Payment

For most first-time homebuyers, their mortgage is the largest loan they’ve taken out in their lives. It can be a challenge to fathom the scale of the cost. The number changes significantly based on interest rates and the details of your loan, but mortgage interest can wind up accounting for 50% or more of the total payments you make. If you thought paying $900,000 for a house was a lot, consider the final costs after interest.

The single best way to reduce those interest costs is to increase the size of your down payment. You already need 20% to avoid having to pay mortgage insurance, but going even higher can pay dividends down the road.

#2 Use the First Home Savings Account

There are new tools available for first-time home buyers trying to save up a bigger downpayment. The FHSA is a unique type of savings account that makes contributions tax deductible, like an RRSP, but also makes withdrawals non-taxable, like a TFSA. The only caveat is that withdrawals have to be spent on your down payment.

If you have extra income, it can be a smart tool for saving more on taxes and putting those savings toward your first home. 

#3 Plan to Build a Rental Unit

Including plans for a rental unit in the basement or as an ADU (Accessory Dwelling Unit or a secondary, self-contained apartment that is located on your residential lot) can afford you a larger mortgage than you otherwise would have qualified for.

Housing prices aren’t the only part of the real estate market that has risen considerably in recent years. Rents have climbed, too, and that presents you with a great opportunity to offset your monthly mortgage costs.

Including an ADU or basement apartment in your house is a smart financial move, and it can provide stability and income for years to come. You may even be able to unlock new funds to renovate and build with a home equity line of credit.

There are strategies for getting around high-interest rates. Save a bigger down payment, use all of the financial tools at your disposal, and turn extra space into a rental unit.

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