When it comes to buying your first home, a big part of that decision should be based on what your current financial position is and the impact a home loan will have on your finances and lifestyle.
For many first-time homebuyers, saving what is required for a down payment can seem overwhelming. However, sometimes saving for a down payment is as simple as managing your budget differently.
Start with a goal
One of the best ways to save is to have a goal. It will keep you motivated and give you something to work towards. For example, you may choose to save a 10% deposit plus expenses (usually 5%) for your first home. But the more you can save, the better off you’ll be. Find out how much you need to put aside in order to reach your savings goal.
Create a budget
Write down how much money you bring home each month; write down the payment amounts for each of your monthly bills; subtract your expenses from your income to determine how much extra money you have each month.
Develop a culture of saving
Your first priority should be developing a culture of saving. This not only helps you in budgeting and planning for the future but also satisfies banks and other lending institutions that you have a clear commitment to save.
When you go shopping, ask yourself if you really need the item you are thinking of buying. If you don't need it, don't buy it. Put the money into your savings account instead. Remember that small amounts of money can add up to large sums over time.
Start an automatic saving plan
Make saving automatic by setting up an automatic savings plan at your bank to regularly move a specific amount of money directly from your chequing account to a savings account. You’ll be surprised at how much you can save and how quickly the “pay yourself first” approach adds up.
Borrow from your RRSPs
If you qualify as a first-time homebuyer, you may be eligible for the government's Home Buyers' Plan (HBP). This allows you and your spouse or partner to withdraw up to $25,000 each from your Registered Retirement Saving Plans (RRSPs) to add to your down payment or to cover purchase-related costs.
Best of all, you don't have to pay income tax on the funds, as long as you repay the total amount to your RRSP over the next 15 years. The repayment period starts the second year following the year you made your withdrawals. If the full $25,000 is withdrawn, the minimum annual repayment would be $1,666.
Take a holiday from tax
If you open a new Tax-Free Savings Account (TFSA), you won’t pay any tax on earnings, which will help you compound your savings. You can contribute up to $5,000 a year to a TFSA, and save for anything you like, tax-free.
Review your mortgage options
Once you make the decision to purchase a property, the next choice is the type of loan to suit your budget. The two most common types of loans are the variable interest rate loan and the fixed interest rate loan.
You can now choose to pay back your mortgage over 25 or 30 years, instead of the traditional 20-year amortization period. This means you will pay more interest over the long term, but you can reduce monthly payments to get into your starter home. You can always change this later, once your income rises and you can pay your mortgage down faster.
Get into a starter house
Try to be as flexible as possible when choosing your first home. Unless you’re status conscious, your first home doesn’t necessarily have to be your dream home. You could settle for a starter home, which you can afford with a small down payment and easy mortgage installments. There are plenty of lower-priced houses out there in need of repair, with some "Do-It-Yourself" projects where you can add more value to the house. Be careful not to buy a place where the cost of repairs will eat up any profits you might make when you sell.
In just a few years you will build enough equity in your starter home to make it easier for you to sell and move into your dream home.
Buying your first home is an exciting process. After all, your home could be the largest asset you’ll ever own. Being able to finance most of its cost will take a load off your back in the future.