Saving up for a first home is a daunting job, but it can be done if you follow the right strategy. Whether you’re just getting started or you’re in the middle of saving up for a place to call your own, here are some tips to make the process a little bit easier, and a little bit more enjoyable.
Do your research as early as possible
Saving for a first home is a big job but if you’re only working toward saving a big pile of cash, you might end up feeling like you’re spinning your wheels. As early as you can, start doing some research and come up with a rough idea of what you’d like to accomplish and how much you need to save.
Start by looking at real estate listings in the area where you’d like to buy. For an accurate picture of what you can expect to spend, use websites like Zoocasa to find the sold prices for homes that are similar to what you want.
Home prices are only part of the equation, however. You’ll also want to do some research with a mortgage affordability calculator to find out how much you can actually afford to spend, and how the size of your down payment will affect your monthly payments.
Compare today's top mortgage rates
If you’re in a situation that can make it harder to get a mortgage, like if you have bad credit or you’re self-employed, this might be a good time to check in with a mortgage broker as well. Mortgage brokers work to compare mortgages on your behalf, and they can give you a clear picture of how much you can afford.
Set your time horizon
Knowing the approximate down payment you’re working toward can help you set a realistic savings goal, but having a set timeline can help light your savings fire.
Let’s say you’re planning to spend $400,000, and need $30,000 to cover your minimum down payment, closing costs and moving expenses. Saving that much money can feel like an impossible task, too big to take the first step.
But if you add in a timeline, your job becomes much more clear. To save $30,000 in two years, you’ll need to put away $1,250 per month. If your goal is to buy in four years, you’ll need to save $625.
Setting a timeline can also help you make sure your goals are reasonable and realistic. If you’re living with your family and have a full-time job, saving $1,250 per month might be easily doable. But if you’re renting and you’re self-employed, even half of that might be a stretch. Depending on your situation you might need to take longer to save or re-evaluate the kind of home you want to buy in order to make it work.
Save like you own the place
Owning a home is expensive. There are lots of ongoing costs that include your mortgage, property taxes, heating costs and utility bills (and if you’ve been comfortably helping yourself to your parents’ fridge as well, go ahead and add in groceries). A great way to save money and get accustomed to the reality of homeownership is to save at least as much as you expect your home to cost you.
For example, if you’re planning to buy a $400,000 home with a 5% down payment, your monthly payment with today’s best mortgage rate of 2.89% (as of April 8, 2019) will be $1,848. Add in $250 per month for property taxes, $100 for heating, $100 for other utilities, and $600 for maintenance (this could take the form of fees for a condo or your own expenses for a freehold home). That totals $2,900 per month in carrying costs. Subtract your current living expenses, and that’s the minimum amount you should be saving.
If the number you’re left with is way too high, that’s a sign that you need to adjust your plans. You can make lifestyle adjustments to free up more cash for savings, or plan to spend less on your home. It might be a tough pill to swallow, but I recommend this strategy because it’s better to find out that you can’t afford your home before you buy it than after.
Use the right tools
There are programs in place for first-time homebuyers to save for a first home. Use them wisely.
The first and most important is called the home buyers’ plan (HBP). This program allows you to withdraw money from your RRSP, tax-free, to buy a first home. Under new rules, you can withdraw up to $35,000. The catch is you have to pay the money back to your RRSP over 15 years – so a $35,000 withdrawal will turn into $195 per month in forced retirement savings.
The beauty of the HBP is that you can defer the income tax on the money you save to buy a first home. You can save your money directly to your RRSP, get a big tax refund for having done so, and then take the money back out to buy your home without penalty. You then have a great incentive to make regular RRSP contributions, and in 15 years you’ll have a decent start on your retirement savings, and a home.
The wrinkle with this to be aware of is that you can’t withdraw the money from your RRSP to buy the home until after you’ve entered into an agreement to buy the home. So make sure you keep some cash outside of the RRSP that you can use for a deposit when you buy the home. For this portion of your savings, a high-interest savings account will help your savings grow while keeping it easily accessible.
Go easy on yourself
There’s more to life than saving money. Many personal finance writers have made a name for themselves by saving to the extreme, making huge sacrifices in the name of getting out of debt, paying off their mortgage or growing their personal net worth. These are entertaining and admirable examples, but trying to emulate them can cause you to pull out all your hair. If working two jobs and renting out every room in your apartment and sleeping on the couch so you can buy a home in a year gives you satisfaction, go for it. Otherwise, keep your goals reasonable and leave yourself some slack to enjoy your life. There’s no reason you can’t save for a home, and take a vacation, and enjoy the occasional latte or night out.