There’s been a lot of talk in the media lately about whether or not homeownership is a good investment. As a late 20-something, I was raised to believe that building equity in a home would be one of the best investments I could ever make. But as prices continue to go up, just saving the initial investment for that home – a down payment – seems further and further out of reach. And I know I’m not the only hopeful first-time homebuyer who is feeling the pinch.
Last month, BMO released a survey that showed we – first-time buyers* – have had to increase our budgets to an average of $316,000; that’s up 5.4% from the $300,000 we were budgeting in 2013. Since the national average home price is now up to $401,419 – a 6.0% increase from March of last year – our increased budgets, on average, are on par with what’s happening in Canadian real estate. But can we actually afford these home prices?
As it turns out, we can. Of course, it can take some serious penny-pinching, budgeting and lifestyle-changing efforts to make it happen – but we’re up for the challenge. Here are three things first-time homebuyers are doing right, before entering homeownership.
1. Changing their lifestyle to save for a down payment
According to the results of BMO’s survey, 61% of first-time homebuyers have made cutbacks to their lifestyle in order to save for their first home. Your “lifestyle” includes your habits, possessions and attitudes, so cutbacks to it could include everything from nixing your daily takeout coffee (habit), to giving up shopping after realizing that what you own right now is enough (possession) and deciding it’s time to focus on saving money versus spending it (attitude).
While changing your lifestyle to save may seem tough at first, it’s important for first-time buyers to do so because it preps them for life as a homeowner. Once they’ve saved their down payment, purchased a home and started making mortgage payments, first-time buyers enter a whole new world: one full of maintenance, upgrades and renovations. By learning how to make cutbacks now, they’re better prepared to do so again when their home begs for an extra bite out of their budget.
2. Delaying homeownership until they can save more money
Another smart move 60% of first-time homebuyers are making is delaying their home-buying timeline in order to save more money. Of course, 39% cited rising real estate prices as the main reason for doing so, but there are a couple of reasons this is still a smart move, and both have to do with the average down payment first-time buyers are making, which is 16% ($50,576).
The first is obvious: the more money you put down, the less you need to borrow for a mortgage. And the less you have to borrow, the less you have to repay – especially in interest costs. Sounds good, right? But the best reason for first-timers to wait to buy until they can afford to put more money down is so they can pay less – or completely avoid – CMHC insurance. Sixteen per cent isn’t enough to avoid it altogether though, so a 20% down payment should be the goal.
3. Unwilling to break their budget
Finally, and this one is my favourite, 60% of first-time homebuyers plan to set a fixed budget with a maximum amount and refuse to go over. This is smart for so many reasons. First, as I mentioned in my top point, homeownership is expensive. On top of the mortgage payments, home insurance, condo fees, etc., regular home maintenance can cost anywhere from 1 to 4% of the value of your home each year!
Second, homeowners don’t just want to sit around at home all day, do they? No, they want to go out, do things, travel, etc. By deciding on a max budget and sticking to it, these first-time buyers are keeping some wiggle room in their budgets for their home, life and fun.
The best way to decide on a max budget is to get pre-approved for a mortgage. By sitting down with a mortgage broker or lender, first-time buyers can have their income and current debt commitments evaluated, in order to determine exactly how much they can afford to borrow for a home. They’ll be given a max purchase price, and learn what the corresponding monthly mortgage payment would be at that price, which can help them start their house-hunt.
So, the lessons first-time homebuyers in Canada can teach us are to: cutback where necessary, save more and not go over budget. Sounds like good financial advice to me – especially for anyone who is thinking of getting into the housing market.
*The survey results are based on interviews with 513 first-time homebuyers in Canada, ages 18 and older, conducted in early 2014.