A recent story by Global News has drawn attention to the lifestyle penalty Canadians pay for renting their homes instead of owning. The piece shows a variety of reasons why renting is made undesirable here: government policies make it more profitable for developers to build condos than rental apartments; rents are too high for many people to live comfortably in big cities; and renters suffer consequences from a lack of control over their homes.
All of this has prompted the homeownership rate in Canada to far surpass our counterparts in other developed countries. More than two-thirds of Canadians choose to own their home, compared with 63% in the United States and just 45% in Germany.
If you’re among those who are feeling the pressures of renting, ownership can look like an attractive option. But it takes hard work and savings to get there. For those who want to join in the great Canadian homeownership dream, here are some tips for saving for your first home.
Start with affordability
Generally speaking, owning is more expensive than renting. And with the banks in charge, you’ll have to meet some stringent criteria to get approved for a mortgage. From a buyer’s perspective, getting one of the best mortgage rates in Canada can help lower payments, but thanks to the mortgage stress test, you’ll have to qualify for your mortgage at a much higher rate than you’ll actually get. With that in mind, there are only a few big levers you can pull to affect affordability: your income, the purchase price of the home you buy, and the size of your down payment.
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Since most Canadians can’t flip a magic switch and start making more money, your options come down to buying a less expensive home or saving a bigger down payment. A mortgage affordability calculator can help you determine how much mortgage you can afford, and how the size of your down payment will affect your monthly payments and maximum purchase price. Keep in mind that what you can get approved for could be a lot higher than what you’ll realistically want to spend.
Factor in closing costs
Once you know how much of a down payment you need, you’ll also need to save for closing costs. For first-time homebuyers, lenders will want to see proof that you’ve saved up the equivalent of 1.5% of the purchase price to cover extra expenses like lawyer fees, adjustments (reimbursing the seller for things they may have paid for in advance), and taxes.
Depending on where you buy your home, you may be able to eliminate some of this expense by taking advantage of a land transfer tax rebate for first-time homebuyers.
Tap into the Home Buyers’ Plan
The Home Buyers’ Plan (HBP) is a savings tool that allows you to save using your registered retirement savings plan (RRSP) and withdraw up to $35,000 without penalty to buy your first home. This is particularly advantageous because RRSP contributions significantly reduce your tax burden and you can use your tax refunds to accelerate your savings.
However, you’ll want to keep a few things in mind when using the HBP. Most importantly, the money you withdraw has to be paid back to your RRSP over a period of 15 years. If you take out the full $35,000, that works out to $195 a month you owe to yourself. You’ll also want to be careful about how your RRSP is invested. Talk to your RRSP provider about lower-risk investment options so you don’t lose money that’s earmarked for a home.
Set aside some money in a high interest savings account
The HBP is a great savings tool, but you can only access the cash after you’ve signed an agreement to purchase a home. That means you’ll need cash in a savings account for expenses that come up early in the purchasing process, most notably a deposit to accompany your offer.
That’s why you’ll need a high interest savings account. These accounts pay a lot more interest than typical big bank savings accounts, so your savings will grow while you keep your money parked. They also allow for much faster access to money than other investments so you can act fast when making an offer for a home.
Take your time and save what you need
While renters might face a lifestyle penalty, homeowners spend more money. Between maintenance, repairs, property taxes and all the things you want but your landlord would never pay for, you’re almost certain to have higher monthly costs as a homeowner than you do now. As alluring as homeownership is, you will be far happier if it doesn’t come at the expense of having money for other things in your life. Save more than you think you’ll need, and budget for a higher down payment. You’ll be happy you did.