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Purchasing power is known as a currency’s buying power. Since rising prices directly impact the type and size of home you can buy, it can weaken over time due to inflation. Typically, the better your financial portfolio, the more options you will have to choose from when working with lenders. A more stable financial situation means you’re less of a risk to a lender, and in turn, you can expect to see better interest rates, lower costs and fees when looking for a mortgage or other personal financing.
Sometimes regardless of volume or industry, disruptions in the market can cause a shift, taking the purchasing power from the buyer and placing it in the hands of the lender. If you find yourself in this position as a buyer, there are still a few ways you can gain a strategic advantage by looking inward.
Your debt-to-income ratio plays an important role in your ability to leverage purchasing power as a borrower. If you’re already carrying a lot of debt and your ratio is unbalanced, lenders will see you as a risk and you won’t be able to do much negotiating from that position. If, like most Canadians, you have debt to repay, come up with a plan to get that under control so you can better forecast when you’ll be debt free or when your debt-to-income ratio will be low enough to lessen its impact on your financial situation.
If you’re carrying debt from multiple sources (loans, credit cards, etc.), it may be worth exploring debt consolidation. This process compiles all your debt into one place so you can get access to a consistent interest rate (often much lower than credit cards) across the board while you work to pay down the lump sum over time. Be sure to investigate this option further with a professional to determine if it’s a good fit for your needs.
Improve Your Credit Score
Your credit score is a three-digit number that’s calculated by the credit bureaus in Canada (Equifax™ and TransUnion®). This score ranges from 300-900 and is an indication of how creditworthy you are, or how likely it is that you’ll be able to pay banks and other financial institutions back when you apply to borrow money.
Your credit score takes these six factors into account:
- Payment History 35%
- Credit utilization 30%
- Credit history 15%
- Credit inquiries 10%
- Credit mix 10%
- Any instance of being sent to collections or filing for bankruptcy
Understanding what your credit score is and how it’s calculated will help you better understand how to improve it, thereby improving your purchasing power. Those three digits could help you determine the interest rate you’ll receive when you apply for a mortgage/loan, so understanding what your score is and where you land on the scale will help you get a better grasp of what you can do to improve.
Save For Down Payment And Closing Costs
Setting yourself up with a savings goal will help ensure that when you’re ready to speak with a lender, you have the lump sum necessary to offset any risk. Showing that you’re a responsible borrower and that you can manage money strategically will always bode well in your favour with a financial institution. It’s wise to create a budget so you can determine how much of a down payment you’ll need to save based on the amount you’re looking to spend on a home and what amount is recommended for closing costs based on your geographic location and the current market. Once you’ve decided on the dollar amount, you can determine how much you’ll need to save each week, biweekly, monthly, etc. in order to meet that goal by a certain date. Be sure to take into account all your sources of income, a repayment plan for your debt (if applicable) and a savings plan so you aren’t left high and dry with no savings once you obtain your financing.
There are plenty of ways that your actions can have a direct impact on your ability to negotiate with lenders when looking to borrow money or obtain financing. Ensuring that you’ve done your due diligence with your personal financing, means you’ll have more leverage when discussing your intentions with a lender. Come to the table as prepared as possible and you won’t have to worry about losing the upper hand in financial negotiations. This doesn’t mean you need a perfectly clean financial slate, it just means you’re aware of any shortcomings and have a plan actively in place to improve your situation.
Want to learn more about home financing options? Curious what your next steps are in the home buying process? Get in touch with our team today!