A Plan to go from Renter to Owner
There’s a reason many young people choose to live with their parents well into their twenties. Real estate is expensive and saving money on rent and utilities (and perhaps even groceries) can give you a real leg up in saving for your first home.
For many, however, living at home isn’t an option. If you don’t live with your parents, and you don’t own your own home, you’re more than likely a renter. And if you want to own your own home, the expense of renting can make saving up for a down payment seem like an impossible task.
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But just because you are out on your own, doesn’t mean you can’t save up for a place that truly belongs to you. All it takes is a little determination and a plan.
Step one: find out how much you can afford
With renting, affordability comes down to what the landlord decides. When you buy a home, the lender is in charge – and they’re interested in more than just your monthly payment. They make sure you can afford to pay for all of the costs of owning a home, including your mortgage, property taxes, and heating expense. As long as you have good credit, the sum of these monthly expenses can add up to no more than 39% of your income. Add in your monthly debt expenses, and the ratio can be no more than 44% of your income.
Since a lot of these are moving parts – mortgage rates, property taxes, and heating expenses can vary by property, and your down payment is also an important variable – a mortgage affordability calculator can help you get a general sense of what you can afford.
Be realistic in this step. The maximum amount you can get approved for may be more than you want to spend.
Step two: check out the market
Now that you know how much you can afford, take some time to check out the real estate market and see if you can get what you want. Depending on the real estate market in your area, you may find that it’s to your benefit to continue renting. Or, you may find that you need to adjust your expectations for the home you want to buy.
The point of this isn’t to find your dream home yet. It’s just to see what you can get within your affordability and decide on how much you’ll need to save for a down payment. If you’re planning to buy a home for less than $500,000, you’ll be able to do it with as little as 5% down. Factor in about 1.5% of the purchase price for closing costs and moving expenses, too. That means if you want to buy a $500,000 home, you will save at least $32,500.
Step three: make a budget for ownership
What will your monthly expenses be when you own a home? You’ll have to pay for lots of things you don’t have to worry about when you rent. In addition to the mortgage, you’ll also be on the hook for property taxes, hydro, gas, water, sewer, internet, and maintenance. Do some research to find out the average cost of these bills for a home in your desired neighbourhood and add it all up. The difference between the amount you currently pay in rent and utilities and the amount you would pay after buying a home is the minimum amount you should be saving each month.
With this plan, you’ll get a sense of what your monthly budget will look like when you own your own home. If things are too tight, you’ll find out in lots of time to adjust your plan. If you’re able to save with ease, you’ll know you’re in good shape to buy a home, financially speaking.
Step four: save using the right tools
There are a few tools you can use to save for your first home more effectively.
An excellent program you should consider taking advantage of is the RRSP Home Buyer’s Plan (HBP). This plan allows you to save up to $35,000 in an RRSP and withdraw it tax-free to buy your first home. You will then have to repay yourself over the course of 15 years.
The primary benefit of saving using the HBP is that you can essentially save before-tax dollars for your home. And, it provides you with a strong incentive to kickstart your retirement savings after you buy. The drawback is that you can only withdraw money tax-free if you buy a home, so if you change your mind later you won’t be able to easily get that money back. (This can also be a good thing if you find yourself tempted to dip into your savings for things you don’t need.)
You can also save in a high-interest savings account. These accounts pay a higher rate of interest than most big bank savings accounts, so your money will grow faster. They don’t offer the same tax advantages as the HBP but they leave you a lot more flexibility to withdraw money when you need it. Plan to save at least a portion of your down payment in savings account so you’ll have quick access to your money for some of the earlier expenses like your real estate deposit.
Step five: get pre-approved
When you’ve finally saved up your down payment and you’re ready to go shopping for your first home, start by getting a mortgage pre-approval from a mortgage broker. This process will give you a clear picture of how much mortgage you can afford and ensure financing won’t be an issue when you buy a home. Getting pre-approved also locks in a mortgage rate for up to 120 days, so you can take your time and enjoy your house hunting experience.
Put the plan in action
If you’re ready to stop renting and own your home, it’s time to get to work. Fire up the mortgage calculator, start looking (realistically) at listings, make your budget and start saving using the right tools. The sooner you get started, the sooner you can move into your new home.