Home-ownership is a major personal & financial goal for most young people. It’s also one of the biggest financial challenges, especially with the minimal wage growth and soaring price of property.
With real estate prices seemingly rising endlessly it can seem impossible to get a foothold in the market. As a result, many young people panic and rush to buy before they can really afford it… don’t be one of those youngin’s
If you can’t afford to put 10% down, you can’t afford a home
Sad news everybody: if you’re scraping together 5% to put down on a home and struggling to come up with more… you’re not ready to buy.
Home-ownership is uber expensive, and this is true long after you get the keys to your new place. Virtually everyone focuses on getting together the down payment because it’s the largest upfront expense, but the ongoing costs of owning property — like repairs & maintenance, mortgage default insurance, and property taxes — can really put a damper on your long-term financial health if you’re not careful. See our previous blog post for more on this.
In order to keep extra cash in your monthly budget and protect yourself from volatility in the real estate market, you need to put at least 10% down on your first home. Ideally, you’d put 20% down, but with the average house price in Canada nearly $500,000, there are very few 20- and 30-somethings with a spare six-figures lying around… A 10% down payment is enough to lower your monthly mortgage payment, reduce your mortgage default insurance, and secure enough equity in your home to whether small dips in the real estate market.
Saving the extra 5% of the house value will give you more equity. It will be a better return on your investment!
Save in your RRSP first, TFSA second
Fundamentally it boils down to one simple truth:
It is better to spend tax-deferred savings than tax-free savings.
The TFSA is the best retirement savings vehicle available to Canadians, but most don’t see it that way. Because the account has no rules against, or penalties, for withdrawals most people use the TFSA for everything but saving for retirement. This is usually where you stash vacation savings, spending money, and yes, house down payments. But constantly making contributions and withdrawals from the TFSA undermines its tax-free power. You don’t need to earn tax-free interest on your vacation savings, you do need to earn it on your retirement savings.
In Canada, we can withdraw up to $25,000 from your RRSP for a down payment on your first home under the First Time Homebuyer’s Plan. Of course, in order to make a $25,000 withdrawal, you’ll need to actually have $25,000 in your RRSP in the first place, so start saving. Once you’ve banked $25,000 there, you can start saving the rest of your down payment in a TFSA or unregistered account.
Don’t forget to set aside extra for those added costs
Land transfer taxes, realtor fees, home inspection costs, and sales tax on your mortgage insurance can add anywhere from $5,000 to $15,000 (or more!) to the cost of buying your first home. Again, this is why a 5% down payment is not enough! Once again, see our previous post.
You’ll need to save above and beyond your down payment fund by at least 15%. This means if you need a $40,000 down payment for the property you want, you’ll need to save an extra $6,000 for possible associated costs.
The most important thing is to be aware of what expenses are heading your way and which of them you have to take care of and which ones are avoidable, so nothing catches you by surprise.
Save consistently and wait for the right moment
It’s hard to save up a 10% down payment. It takes a lot of discipline and a lot of time. If you find it painful to sock away hundreds of dollars a month now, just remember you won’t get to ever take breaks from your mortgage. So really it’s good practice for the life-long commitment you’re going to make.
Now it just comes down to the right property and the right moment. Don’t rush.
Check with your financial advisor first, contact us at KBH and we’ll be happy to help with this exciting stage in your life: info@kbh.ca