It’s the biggest investment most of us will ever make but it shouldn’t involve skipping all of the little luxuries.
The real estate market in many parts of Canada is a wild ride of high prices and little in the way of inventory, all set against a very low cost of borrowing. Nonetheless, most people aspire to homeownership – it’s a litmus test of adulthood and in most cases, it’s also a very sound financial investment.
While anything less than a 20% down payment will require you to get mortgage insurance, you can put down as little as 5%. I say ‘as little as’ but if you’re looking at a $400,000 house in Ottawa, that’s still $20,000. You want to put the full 20% down and save on the mortgage insurance premiums? That’ll be $80,000, please. Unless your name is Kardashian, that’s not pocket change!
© down payment image via Shutterstock
What’s the number one way people get the 5%-20% they need to put down on their first home? I’ll give you three guesses, but I’ll bet you’ll only need one: Ask Mom and Dad. Let’s just assume, however, that this isn’t an option. What else can you do besides skipping the trip to Starbucks every day?
Figure out how much home you can afford to buy
When you’re looking at how much you can afford, you need to look beyond just the mortgage payment amount. Include:
- Condo maintenance fees (if applicable)
- Property insurance
- Property taxes
- Maintenance costs
- Utilities
You’ll also need to consider how much debt you are already carrying. Here is a worksheet that can help you figure out / estimate some of these costs.
Ideally, when you go home shopping, you will do so with a pre-approved mortgage in hand from your bank or mortgage broker: this will help guide your search and ensure you don’t spend more than you can really afford.
Three ways to pull together your down payment
- Borrow from your RRSP – First time borrowers can pull up to $25,000 under the Home Buyer’s Plan from their RRSPs. You have to repay it within 15 years or the balance is considered as income and becomes fully taxable, but if you’ve been working and contributing for a while to an RRSP, this is a reasonable option
- Downsize your existing life – Is it an option to move in with Mom and Dad for a year or two, rather than borrowing from their retirement fund? How about having one car in the family, instead of two? Or maybe learn to appreciate the bus? Can you live in a smaller apartment for a year or two? Become a master of the ‘staycation’? Giving up the little luxuries like coffee won’t make much of a dent, but the BIG ticket items like cars, vacations and larger apartments can boost your down payment fund quickly. Put the extra money in a TFSA and pretend it’s not there – no sneaking funds out for a quick trip to the sunny south.
- Keep a spending diary – If you aren’t sure where your money goes each month, it’s time to start tracking it. You’ll be amazed after a while to see how often you spend money without really thinking about it and where you can cut some of your expenses:
- Going out to eat (have friends over – it’s cheaper and we’ve got ALL the recipes you might need right here!)
- Buying books (the library is free!)
- Movies all the time (Netflix my friends: $8/month for all you can view.)
Money maven Gail Vaz-Oxlade said it best: “Home ownership is great, if you do it right. Buy a home you can’t afford, commit to payments that stress you out, and you’ll rue it. Yup. Your home will be an albatross around your neck. Remember, the point of life is to enjoy the moment. If all your moments are spent wondering when your house of cards will fall down, how much fun can you possibly be having?” Who can argue with that?
Do you have any tips for saving for a down payment?
AD says
I read an article today, where home ownership was quickly turning into an “elite” right of passage for young Canadians due to the housing prices and market valuations in larger centres (like Toronto, Vancouver, Calgary); where people were only buying if the bank of Mom and Day were able to provide a loan or gift of down payment. The tips you provided are great, but may I also suggest raising your kids to understand money, saving and investing… This is something that is not taught in school, nor do most families teach it. I was lucky in that the woman who helped raise me understood that saving was not enough and had my sister and I investing our money from the time we were 5 years old, so that when I turned 25, I was able to purchase my own home (with my own money, on my own as a single woman); it was a fixer-upper and I worked hard to flip it after two years and upgrade to a better home… Education and life skills. Something that is important is missing in out kids’ lives.
Donna Wilson says
Great tips for an important purchase in life!
SABINA EDWARDS says
I think another thing to look at is bedroom communities!! If you can get a home in a community that is a 25 min drive on double highway (takes 20 min to get to the city say) and the prices are over $100,000 cheaper, then figure out the costs that way too. When I worked in the city I could literally get to work faster then co-workers who lived across the city (because of their heavy traffic at that time of day and myself traveling on a highway and a road that was going into the city was a direct route to my workplace) Can you commute with someone? that cuts costs as well. For us, a 2 bedroom home for $43,000 in a town that was 20 min away was our choice (15 years ago). Houses are well below the price the city has, even though its a mine town (two potash mines) Kids walk to school, ride their bikes and dont lock them up at the school, play outside and even go trick or treating without parents.
Nate says
Great tips for saving