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Hoping it's the right time to buy a home? Here's a game plan

We're finally seeing some hopeful signs for the wannabe home buyer who has been priced out of the market.

The twin cities of unaffordability, Vancouver and Toronto, have cooled down some. And many other cities across the country are producing more or less normal price gains that make it possible to buy without committing financial self-strangulation.

A variety of measures taken by government have curbed the huge year-over-year price gains seen in the past in Toronto and Vancouver. Add the rising mortgage-rate trend and you get an outlook that could mean flat or lower prices. Aspiring buyers, it's time to start thinking about your game plan.

Read more: Canada's cooling experiment: How a year of reform has changed the market

To start, it's important to understand that rising mortgage rates are as much your enemy as your friend. Cumulatively, higher rates could be the mallet that pounds housing prices lower. But for now, higher rates just make home buying more expensive.

We've seen rates for fixed and variable rate mortgages rise about 0.25 of a percentage point or so in the past couple of weeks. If you paid the June national average price of $504,458 for a house and put 10 per cent down, this rate increase would boost your monthly mortgage payment by about $60 over what you would have paid previously.

Let's say mortgage rates go up another 0.25 of a point and housing prices pull back 5 per cent. Combined, these two developments would cut your costs by a bit more than $50 compared to current costs.

You'll start to turn the corner on better affordability if price declines deepen. If rates rise 0.25 from current levels and prices fall 7.5 per cent, your monthly payments would cost $107 less than they would today. With a 10-per-cent price decline, you're saving $162.

Keep your eyes on prices as mortgage rates rise. You need a serious price drop for higher mortgage costs to work for you rather than against you.

Protect yourself from higher mortgage costs by locking in a rate right now. To get the lowest possible rate, you need to understand some changing dynamics in the mortgage market. Mortgage brokers have long had a strong competitive advantage over banks in that they could access rates from a wide variety of lenders, some of them able to beat the banks both on rates and terms such as prepayment penalties. But Rob McLister of RateSpy.com said changing conditions in the mortgage lending business have reduced the ability of brokers to offer bank-beating rates.

"More than ever before, consumers need to shop multiple lenders and brokers to get the best rate," he said in an e-mail. "They cannot rely on one bank or one broker."

Mr. McLister said brokers still lead the market in some cases, notably mortgages where you have a down payment of less than 20 per cent.

A wannabe home buyer's game plan has to balance both financial and emotional aspects. A tool like our Real Life Ration calculator will help you figure out how much house you can afford while still meeting other financial obligations such as saving for retirement. But if house prices fall to levels that work for you, will you be able to pull the trigger?

A big drop in the price of any financial asset – houses, stocks, gold – tends to scare people away. They figure they'll wait until prices bottom, and then get in. The flaw in this reasoning is that people often wait too long and end up buying after a big rally.

House prices in expensive spots such as Toronto, Vancouver and surrounding cities are very high in relation to incomes. We could see current weakness become a full-blown correction in those cities, but only casual buyers are able to wait for this development.

If there's a sense of urgency to your house purchase, find a price point that makes a home affordable for you and plan to move when the market comes to you. Your purchase may not turn out to be a great investment, but that's okay. Homes are a place to live and raise a family. When they become investments, we end up with unaffordable markets and a lot of wannabe buyers on the sidelines.

Higher rates, lower prices

Here's how mortgage payments vary in various situations where mortgage rates rise and housing prices fall. It takes a fairly substantial price decline to offset a mortgage rate hike. The following monthly payments are based on the average Canadian house price in June of $504, 458.

What if…
Mortgage rates were at spring levels$2,106
Mortgage rates are at current levels$2,164
Mortgage rates rise 0.25 of a percentage point from current levels$2,224
Mortgage rates rise 0.25 of a percentage point from current levels, but prices fall 5 per cent$2,113
Mortgage rates rise 0.25 of a percentage point, but prices fall 7.5 per cent$2,057
Mortgage rates rise 0.25 of a percentage point, but prices fall 10 per cent$2,002

CREA, Mortgage Group online calculator

Notes:

Spring mortgage rate used here is 2.6 per cent for  fixed rate, five-year loan; current rate is 2.85 per cent for five years; down payment is 10 per cent in all examples, and the amortizaton is 25 years; Mortgage default insurance premiums added to the mortgage balance.

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