What’s the rush? The financial “why”
HSBC did an interesting study in the UK in 2014. It suggested that if you buy your first home by 29, you create a positive cycle that not only benefits your own financial situation, but that of your future children as well. Buying early gives enough of a boost that you would be able to help your kids financially by the time you’re in your 60s. Waiting to buy at age 35 or later would create enough of a delay that this help would be more difficult.
What about Toronto and the GTA?
I couldn’t find a comparable Canadian study, but I do know that more than 75% of first-time homebuyers in Canada are millenials, 34 years old or less. And because I work with a lot of first-time buyers, I have seen how frustrated they are in buying a home, and how delays in purchasing mean that the house they wanted two or three years ago is now worth 10% more. So I figured a game plan to cut down the time it takes to buy would be helpful.
How to buy your first home by 29? 15 tips:
It may sound silly, but simply deciding that you are going to buy your first home by 29 (or whatever date makes sense for you), and writing it down, is the biggest step you can take. Get inspired by reading on incredible savers like these people who paid off their mortgage in 5 years, buying two homes (in New York city – and you thought Toronto prices were high!) by 35 like this author. With focus and discipline, it can be done.
2. Pay off high interest debt
If you’re carrying credit card debt, you’re making the process of saving to buy your first home way harder on yourself than it needs to be. The average credit card rate in Canada is between 20-30%, according to the Financial Post, so that means that for every $5,000 you owe, you’re losing between $1,000 – $1,500 each year. Note that I say “pay off”, not necessarily “close” credit. If you use your credit cards or credit lines occasionally, it keeps them active, which helps your credit rating (see # 3). And paying them off in full each month, on or before the due date, means you don’t pay any interest.
3. Make sure your credit is fantastic
A great credit rating and credit report is important. I’ve written elsewhere in my blog about how your credit is evaluated, how to fix it if you need to, and how to make sure it stays amazing (and you should check it yourself to see how it looks). The key is that you will need to prove to a potential mortgage lender that you are a good risk for them to lend money to, when you’re ready to buy. Making sure you have amazing credit can take time. Start now.
4. Use your RRSP strategically
You can access up to $25,000 from your RRSP without a tax penalty for purchasing your first home. If you’re buying with a spouse or partner, they too can use up to $25,000. So, rather than just saving your down payment funds outside of your RRSP, check out whether it makes sense to contribute to your RRSP instead. Use the income tax money you save to add to your down payment fund. For more details on this, check out my RRSP strategies post here.
5. Use your TFSA
Once you’ve hit $25,000 in your RRSP, you won’t be able to withdraw more for your down payment (at least, not without a tax penalty). Instead, consider using a TFSA for some or all of your down payment fund. Interest or other earnings on money in a TFSA are tax-free, creating income tax savings. Pay less tax, save more money. For details on how TFSAs work, and the annual contribution limits, click here.
6. Ask if your parents would be willing to help
Approximately one-third of first-time buyers get help from their parents when purchasing a home, according to Genworth. Getting a gift from a parent, grandparent, or sibling can obviously help with getting a home more quickly, so you should have these discussions early in the process to see if it might be an option. Go to this post for more details on this. And see if adding them to the purchase might help as well. In some cases, your parents’ income can help you qualify for a mortgage sooner than if you were to do it alone.
7. Get rid of your car
The cost of owning a car in Toronto varies, but it’s generally over $10,000 per year, once you factor in gas, insurance, maintenance, and depreciation. Check out this great calculator from CAA to see how much your vehicle is costing you. Unless your car is essential to your employment, it may make more sense to use public transportation and car sharing programs instead. If you do need a car, never buy new. And be careful with leases and car loans to make sure you totally understand your cost of borrowing. As with credit cards, a car loan can reduce the amount of mortgage you qualify for, so keep any monthly payments to the bare minimum. If Warren Buffett believes in keeping car spending at the bare minimum, we non-billionaires can assume he’s on to something.
8. Cut out non-essentials
Keep a log of your spending for one month, then sit down and review what you’re spending money on. Take each item and calculate how much this costs you per year. For example, if you’re buying a coffee and a muffin each workday for $6, this is $30 per week, and $1,500 per year. See what you can eliminate. Can you skip the coffee and muffin and eat breakfast at home instead? Or can you reduce the cost by bringing a muffin to work and drinking the coffee there? How much can you save? Financial author David Bach calls this number your “latte factor”. (And by the way, his books are great. He even makes a very respectable effort to translate his stuff into Canadian. Highly recommended.)
9. Pay yourself first
I remember reading this in David Chilton’s Wealthy Barber and never forgot it. Financial writers from Nathaniel Hill (Think and Grow Rich) to again, David Bach, talk about this as well. It really is the way to go. Have your savings amount automatically deducted from your account on the same day (or the day after, in case there’s a delay) that you get paid. Then you never have to think about it.
10. Earn more money
Can you add a part-time job to your schedule? Or make money online by freelancing or blogging? Make sure you allocate every after-tax penny of this to your home purchase fund. And note that part-time income can be used to help you qualify for a bigger mortgage as well, as long as you can show a two-year track record on your tax return.
11. Live with your parents
If you can, live with your parents and save the money you would have paid toward rent. A monthly rent payment of $1,500 works out to $18,000 per year, and that doesn’t even account for additional expenses you might have like internet, laundry, and parking. Even if you pitch in toward expenses (which I’m sure your parents would appreciate), you can still save a ton. If living with your parents isn’t an option, investigate ways to reduce your rent, either by adding a roommate or finding a cheaper apartment. Remember, it’s only temporary!
12. Team up
Do you have a friend or friends who also want to buy? Do it together!
Make sure you create a written partnership contract, including everything from percentages of ownership, to what happens if someone wants to move out or sell. Have a lawyer review it for you. People change their minds, people forget what exactly was agreed upon, life happens. Having a written agreement means that everyone can easily see what was discussed and decided. Take a look at these tips from Genworth for more tips on buying with family members.
13. Be logical, not emotional
It’s so exciting buying a home, and a beautifully staged home can sucker in the most seasoned home buyer. Be wary! I’ve participated in a bidding war myself, as have some of my clients. It’s easy to lose sight of your budget and logic in the throes of intensity and emotion of any home-buying situation, even more so if you’re involved in a bidding war. Going in with a list of your top 10 “must-haves” and maximum purchase price is a necessity. Although it’s not fun to get your offer rejected, there’s always another place that might even be better than this one! Looking back, I am so glad we didn’t get the house we bid on – it would have cost us way too much.
And remember the old adage, “buy the cheapest home on a nice street”? You can expand on that and be open minded when looking at geographic areas, too. Places like Mimico and Long Branch in Etobicoke used to be much less desirable than they are today. Working with a great realtor will help you find hidden gems that would cost you less than properties in hot areas.
14. Plan on renting
Consider adding a second suite, basement apartment, or roommate to your plans. These additional funds will help with the affordability of your future home, and enable you to pay your mortgage off faster too. Make sure you check the requirements for landlords in your area – here’s one terrific guide – to make sure you comply with zoning and code requirements, if applicable. The income may even count toward your income for mortgage purposes.
15. Don’t be afraid of CMHC or Genworth
You are probably aware that you need a down payment of 20% or more to avoid default insurance. (For more details on default insurance, check out this video.) If you don’t have 20% down, you can either wait to save up more, or you might be able to buy with as little as 5% down (click here for a full run-down on this). Review your numbers to see if waiting makes sense. In Toronto, property prices have been increasing significantly over the last few years. So waiting a couple of years to avoid the default insurance premium might mean that your property will cost you way more than the premium would have. And if you’re currently paying rent, and would need to pay rent for another couple of years, that’s a cost too. Talking to a good mortgage planner, and getting a mortgage pre-approval so you can really understand the numbers, can be very helpful here.
So, do you think you will take up this challenge? Please let me know how it goes!
And for more reading on first-time homebuyer topics, I’ve got tons of posts for you. Enjoy!
Photo [c] nuttawan jayawan for vecteezy dot com