5 Tips for Saving for Your First Home
If you’re reading this, chances are that you’re looking to save up for a big life purchase - your first home. Congratulations! Buying a home is a great investment that will only appreciate over time.
Home ownership is a growing trend in Canada, as young homebuyers are realizing the problems associated with renting homes instead of buying. Policies at the governmental level make renting unfavourable in Canada because rents are too high in big cities for many to live affordably, and renters also lack control over their homes. This has led the country’s home ownership rate to rocket, with over two-thirds of Canadians choosing to buy their own home.
While home ownership can seem daunting upon first consideration, remember that planning, hard work and savings go a long way. Here are 5 tips to get you started on your home ownership journey.
1. Buy within your means
Owning a home is more expensive than renting, with maintenance and mortgage payments quickly stacking up. There will always be unforeseen costs that come up when you own a home, and these are generally more expensive than outsourcing the problem to your landlord or condo manager. Keeping this in mind, our first tip is to start humbly and consider homes within your means. Factor in all the variants such as your income, the purchase price of the home, mortgage payments and the down payment. The main options our advisors suggest is to either buy a less expensive home or keep saving to make a bigger down payment.
From there, double down on a home that is in line with your long-term financial goals. Getting professional advice on mortgage plans is important, and can be the deciding factor in keeping your home ownership process stress-free and financially manageable. Another helpful tip is to use a mortgage affordability calculator to determine the mortgage you can afford.
2. Closing costs add up
Once you’ve figured out the average down payment and mortgage you can afford, start factoring in the closing costs. For example, what you get approved for may be a lot higher than what you’ll want to spend, both long term and each month.
For a good approval rating, most lenders will want to see that you’ve saved up about 1.5% of the purchase price to cover additional costs other than just your home. This might include expenses such as lawyer fees, taxes etc.
These closing costs can add up but depending on where you live, some of these expenses could be eliminated. There are many programs and rebates to incentivize first time homebuyers, so that is a good resource to investigate.
Some lenders will also provide a lower interest rate, provide quick funding or help you lock in a fixed rate. Often first-time home buyers do not have the kind of credit rating and financial background or history that lenders are looking for. So referring to a private lender who can work with your unique situation can be a solution.
3. Check out home buying incentives
If your city has a first-time home buyers program, definitely look into it as it can help make home owning more affordable in many of Canada’s larger cities. If you can get part of the down payment covered with an interest free loan, it can help you save up to $20,000.
The Home Buyers Plan (HBP), on the other hand, allows you to save using your registered retirement savings plan (RRSP). Essentially, you can withdraw up to $35,000 without penalty, which can reduce your tax burden as well as use your tax refunds to bump up your savings.
Both the first-time home buyers program and the HBP come with their own stipulations such as the payback period and penalty clauses.
4. Saving is everything
All financial experts say that home owning is simply about saving up enough - and it's true. People often underestimate the power of a savings account and how far it can help you when you’re looking to make a big purchase. Opt for a high interest savings account, which will pay you a lot more interest than most typical savings accounts, where the interest rate is usually extremely negligible. This will allow your savings to appreciate without you doing anything. An automated savings plan is also beneficial.
If you’ve done your research on the starting rate for down payments, you’ll know that most Canadians spend between 5 -10% of the purchase price on a down payment. If you’ve started saving early, you’ll be able to pay a larger down payment upfront.
This is always more beneficial as the Canada Mortgage and Housing Corporation (CMHC) can charge a hefty mortgage default insurance. This expense can be avoided with a down payment of 20% or more.
5. Consider a home equity mortgage
Your future home accrues interest over time, so looking into a home equity mortgage could be a great solution if you don’t currently qualify for a loan. A home equity loan, as opposed to other loans, will allow you to draw money from the equity built up in your home. The amount you can take out depends on the value of your home.
If you’re interested in home equity loans, our financial advisors suggest a fixed-term loan for first time home buyers. This loan is a one-time lump sum loan that you can pay back on a monthly basis. The monthly payments don’t fluctuate by month, which provides a great alternative for risk averse buyers who are looking for flexibility to budget according to their varying lifestyle needs.
There you have it: 5 tips to save up for your first home. While home ownership can be expensive, with the right advisors and resources it is becoming increasingly easier to own a home in Canada.
Just make sure to budget for a high down payment and start saving early. If you’re looking for more information on home equity mortgages or to get you started on your home ownership journey, you can always reach out to our licensed team of financial experts.
For more information on home equity mortgages, call Canadalend at 1-866-422-6536 or contact us here.