The average
price of a home in Canada continues to rise, and the new
mortgage rules coming into effect January 1, 2018, have a lot
of people wondering how they will ever get into their first home. As a professional Realtor I work with future
buyers navigating this process all the time. Saving for a
down payment on your first home has become a more
complicated process.
Future homebuyers need
to save not just thousands of dollars but tens of thousands of dollars. For the
average first-time homebuyer, this represents a frightening
task
and has caused first-timers to get creative with their down payment funding.
The first timers that I work with
that are the most successful have that “I
will do whatever it takes” attitude.
These
are just a few types of advice I give when working with first timers.
The first thing you need to do when
saving for a down payment, is to
decide how much to spend on a home. If you aren’t sure what your budget should
be, talk
to a professional mortgage broker and research home values in
your target neighbourhood
with your Realtor.
Say for instance, homes
in
your ideal
location sell for about $300,000. So you would look at purchasing
either an up to date house or a fixer upper that you want to bring to that
$300,000 value by renovating.
Using your
target purchase price as a guide, decide how much you’ll need to save. In
Canada, if a home’s purchase price is less than $500,000, you need to put at
least 5% down. If you plan on spending more than $500,000, you’ll need to save
even more. Remember that the bigger your down payment, the lower your monthly
payment.
Although keep in mind that if your down payments is under 20% you will be
required to pay CMHC or Genworth mortgage loan insurance. So sometimes delaying
your purchase is the best plan.
Factor
in
closing costs
When you buy a home, you need to
worry about more than just the down payment. You also need to pay closing
costs. Here are some of the closing costs you may have when you buy a home:
•Deposit
•Land transfer tax
•Legal fees and disbursements
•Title insurance
•CMHC insurance
•Appraisal fee(sometimes
the bank pays this)
•Property insurance
•Prepaid utility bills
•Home inspection fee
As a rule of thumb, closing costs
amount to between 1.5% and 2% of the value of your home. For example, if you
buy a home for $500,000, you can expect to pay closing costs ranging from
$7,500 to $10,000 Make sure to factor this amount into your overall savings
target.
For a $300,000 home, you can expect
to pay closing costs ranging from $4,500 to $6,000. So add that to your target
down payment of $30,000 for a total savings goal of $36,000
Gifts
from family members
I run into a lot of first timers
that .assume that parents or grandparents will help them with a down payment.
Should this be your case please recognize this as a true blessing as most
parents would never consider this at all. Also people tend to want to spend
more than they should when they get this gift. Be careful not to do that. Only
spend within your means.
Make
a plan to save the rest
If you’re like most people, it is
up to you to save for your own down payment. Saving is the hard part because it
takes discipline and time. Although, I will say that the discipline you learn
in this stage prepares you really well for future challenges in life. You
should embrace these lessons rather than complaining about them. The first
thing you need to do is make a goal. Figure out how much you will save each
month to make your goal a reality. Step one is make a realistic budget. Go back
to previous months bank statements and account for everything. Identify your
needs or must haves and what are the wants? The wants are where you will make
most of your budget cuts. Make a realistic goal amount per month that you will
save. If at the end of the month you have extra unspent cash then put a bonus
amount into your home savings. To help with this process check out Gail Vaz
Oxlade’s website. She is my hero. Also marathon watching of Till Debt do Us
Part, or reading The More of Less by Joshua Becker will help you feel really
good about this whole process. You should also put any windfall money towards your home down
payment. Any extra money from additional pay cheques, tax refunds, birthday
money or money from extra jobs.
Settle
in for the long term
Depending on the size of the down
payment and how much help you receive from outside sources, saving for a down
payment can take years. If this is the case for you, be prepared. Saving a
significant amount of money over an extended period of time can be demoralizing,
frustrating, and just plain dull. But also remember that it’ll be worthwhile to
make a larger down payment and you’ll be able to build equity faster. Don’t
jump into home ownership before you’re ready. Instead, take your time, save a
substantial down payment, find a Realtor and mortgage broker you
trust and eventually you’ll find a home that is right for you.
My
favorite money saving tips
Taking your
lunch everyday can save you up to $2,600 per
year. Most people spend up to $9 on takeout per day. Really it only
takes 5 minutes to pack a lunch.
Meal planning is my number one tip.
Don't waste a thing. Don't throw out food period! Buy wise
and only on sale and you can save $2,500-$3,600
per
year. I
love to teach people about this one. Also go to Google and search Save with
Jamie videos and watch them all.
The average Canadian spends $1.60
to $7.00 per day on drinks. Buy a travel mug and make your own! You can save
$500-$2,500
per
year.
Moving in with your parents is a
great way to save money as a couple. My suggestion is to present this idea as a
business plan to your parents. Involve them. Tell them your numbers and goals
and then be accountable by reporting your progress each month. Set a time line
too and don’t abuse their generosity.
Quit smoking- Wow this is a big
one. People are sensitive in this area but this is a huge money draw. Plus it
is making you sick. Slowly. Save up to $5,000 per year and smell better.
Summary
Buying a home can be a long process
that requires a good chunk of your savings, but think of it all as preparation
for homeownership. You’ll have all of those expenses after you buy your home
too, but you’ll also have large expenses related to the home itself. So think
of this as a dry run to prepare both your finances and your psyche for the
extra expenses that homeownership brings.
If you want more details or just a
good all around chat about this process make a no obligation appointment with
me anytime!
Also Check out my website or Facebook
page for tips on increasing your credit rating!