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Help Saving for a Down Payment

Help Saving for a Down Payment

Author: Tracy Ruddell

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One of the biggest challenges facing first-time buyers is coming up with a down payment. Despite record-low mortgage rates, today’s first-time buyer has it tougher than generations past due record-high rents, rapidly rising prices of houses for sale in Toronto and tightening mortgage rules that demand more money down for properties over $500,000.

It costs you more than ever before to buy a home in Toronto and surrounding areas, meaning buyers have to borrow more, yet it’s tougher to get mortgage approval and there’s little left after paying rent to sock away in savings. This a real catch 22, threatening most young people’s ability to out-earn / out-save the market.

So, what’s an average first-time home buyer to do? Prioritize, make a plan and stick to it. Real Estate is not a pipe dream, it may just take more planning and discipline than you originally bargained for but the financial, physical and emotional rewards are unmatched.

Struggling With Your Down Payment? Save More, Spend Less

This is the obvious mantra for all first-time buyers looking to save for a down payment but it’s probably not what you want to hear. That’s because the cost of living in Toronto continues to skyrocket well-beyond the average earner’s annual wage increase and so saving is not an easy task. Yet, it’s still necessary for most to realize your Real Estate dreams.

If you’re ready to prioritize owning a home and building your personal wealth through Real Estate, you’ll need to make a budget and stick to it. Part of that is making cutbacks in order to realize savings. The first things to reconsider are your largest expenses which, for most Torontonians, are rental costs and car payments. The latter tends to be the easier place to start. If you’re living with someone and have two cars, can you make it with just one? Can you give up your vehicle altogether and take the TTC for the next few years until you’ve saved enough to buy a home?

When it comes to rental savings, your best options (although not easy ones) may be to:

-move in with family at reduced rent or for free until you’ve saved enough,
-move out of your one-bedroom apartment, into a two- or three-bedroom shared house or condo, or
-if you must have your own space, research the savings to be found if you were to move to a slightly less trendy neighbourhood or further out from downtown Toronto. You can use our Neighbourhood Guides to research other neighbourhood options.

When it comes to living with others, we’re finding a lot of young renters aren’t willing to have roommates but the truth is, you may have to do it. I can tell you that most of us here in Management at Property.ca lived in shared houses until we bought our first homes (most of us purcharsed a small condo or loft as the first rung on the property ladder) in our late 20s or early 30s and that was about a decade ago when the market wasn’t quite as crazy.

We’re seeing a lot of young people straight out of University or College who aren’t willing to either a) move outside of the core or b) live close to downtown but in shared accommodation in order to save money and they’re leveraging themselves too high with rent. Bottom line: you have to decide what your priorities and how important saving for your future really is.

Pay Off Other Debt First

It’s always best to pay off debt first (credit cards, student loans, etc.) before starting to save for a home because that debt will continue to pile up once you have a mortgage and it could end up sinking you. In fact, existing debt may prevent you from qualifying for a mortgage at all.

Basically, you want to get rid of bad debt in order to take on good debt. That sounds counterintuitive as a mortgage is a loan which is, ultimately, still debt but the difference is that it’s debt that will build your personal equity over the long term. So, get rid of bad debt first in order to take on the investment opportunities that Toronto Real Estate provides. 

Access Your RRSPs

If you’ve been smart enough to start an RRSP early in life – and/or lucky enough to have an employer with a corporate contribution program – you may have enough already socked away for a minimum 5% down payment. In Canada, first-time buyers are allowed to access their RRSP funds for a down payment as part of the Home Buyers Plan. Just remember, you are borrowing the funds – you have to pay the full amount back within 15 years. Payments must start within 2 years of closing on your home.

For more on borrowing from your RRSP, have a read of our post on home rebates.

 

Compare Tax-Free Savings Accounts to Other Investment Options

Whatever you’re able to save each month, you want to make sure that your money is earning you as much interest as possible while it sits in savings.

Tax Free Savings Accounts (TFSAs) are the go-to for many young Canadians but they’re not necessarily the best option for you. Compare TFSA rates to other redeemable products / cashable investments along with a comparison of investing in RRSPs instead if you're a first-time buyer (in order to take advantage of the Home Buyers Plan, discussed above). RRSPs may be considerably more appealing if your employer has a contribution-matching program.

Whatever your investment product of choice, just remember that contract terms are as important (even more so) than interest rates which are pretty low across the board right now. If you're hoping to buy this year, make sure that the product is accessible either at any time or within a short time frame such as 30 or 60 days without penalty fees. You need to be able to cash that investment out in time to close on a home once you make an offer; on that note, make sure that the # of days until close in your offer accounts for the minimum number of days you’ll need to be liquid.

You also need to consider your financial personality. If, for example, you're not very discplined and worried you may access your savings for other things AND if you know for certain it'll be a few years before you can buy, then you may want an investment with a better rate and a longer term.

Whatever the case, unless you're very market savvy, you should speak with a Financial Advisor at your bank or, better yet, an Independent Broker. A broker will invest your money in the best product available on the market matched to your saving\s goals, flexibility on timing in terms of when and how quickly your investment can be redeemed and your risk aversion.

 

Don’t be Too Proud to Accept a Gift or Living Inheritance

If you’re really lucky, you have a parent or another close family member who’s willing to give you the money for all or part of your down payment. If so, count your blessings and take them up on it because by the time you save that amount, prices may have gone up more than you can afford, pricing you out of the local market. Just know that not all gifts are acceptable as sources of down payment.

In Canada, you are able to be gifted the funds from your parents and typically a close family member such as a sibling but note that not just anyone can gift you a down payment. A more distant relative or a friend may be seen as a dubious source in the eyes of mortgage lenders. Any time you have a financial gift from anyone other than a parent, it’s best to check with your bank or a mortgage broker before you offer on a home as lenders have cracked down on what’s considered an acceptable source of Real Estate funds in an attempt to quell money laundering and other forms of Real Estate fraud.

Don’t Count on a Loan or Line of Credit

If you’re hoping to access your line of credit or any other type of loan (including a loan from a family member), you must clear this with your lender before offering on a property. This is because that, while interest rates have gone down dramatically in recent years, lending rules have tightened and lenders are not accepting some sources of down payment that may have been considered acceptable in years’ past.

We’ll talk more about this next week in our two-part series on mortgage pre-approval.

Start by Setting a Savings Target

The right place to start is by researching the cost of homes for sale in the cities and neighbourhoods you're interested in so that you can set a savings target. Just remember that prices are appreciating quickly - a whopping 17.3% on average in 2016 over 2015 - so you'll need to account for rising Real Estate costs in your plan. Also, ensure that your plan includes the need for your deposit to be liquid.

In terms of online resources, we're launching a new version of this site this spring with Real Estate statistics and trends by individual Toronto neighbourhood, as well as for all the cities across the GTA.

Finally, there are some Toronto REALTORs® who will be happy to take the time to chat with you over the phone or meet with you in person, even if you're not quite ready to sign with them yet. They know that advising you now on how to save and plan for homeownership will hopefully lead you to sign with them as a new client a year or two down the road when you're ready to buy. It certainly doesn't hurt to reach out to a REALTOR® who specializes in the property type and neighbourhood you're interested in; just be up-front with them about your timeline and the fact that you're not ready to make a move just yet.

 

Lead Image by Nobuhiro Asada from Shutterstock.