According to a recent study by Generation Squeeze, there is an affordability gap between baby boomers and their kids. The average millennial will take eight years longer to save than their parents did in the 70s. The report notes in major cities like Toronto and Vancouver, it can take millennials up to 13 years to save a 20 percent down payment based on average incomes and housing prices. These numbers are staggering and can be discouraging if you don’t have a plan in place. However, you can come up with a down payment if you consider these saving strategies.
Calculate Your Home Affordability
To determine how much money you need to save for your down payment, your best bet is to use the Canada Mortgage and Housing Corporation’s (CMHC) calculator. The calculator will show you how much you can afford for your mortgage. You can use this number to calculate a down payment based on the percentage you plan to contribute. In Canada, this ranges from 5 percent to 20 percent based on the price of your home.
Pay Down Debt
Carrying debt costs money as it builds up interest. Your best bet is to pay down all your debt now to clear the path for savings. It will also help improve your debt to income ratio, an important financial element considered by banks when you apply for a mortgage.
The Snowball Method
First, list all your debts from the lowest to highest balance. Continue to make the minimum debts on all your balances but put as much as possible towards paying off your smallest debt. Once that balance is paid off, apply what you were paying on that balance to the next smallest balance on the list. Continue this process until you have paid off all your balances. The amount you can apply to each monthly payment will continue to snowball into larger and larger amounts allowing you to pay down the debt more quickly.
Consider Alternate Transit Options
This may not be for everyone, especially if you live in an area where transit, getting around on foot or biking isn’t dependable or safe. However, if you can, an alternate form of transit will help you save a lot of money on gas and parking. In fact, if you can, consider selling your car. You might gain money from the sale if your car is paid in full, or almost paid off. You can then add this to your savings. Once your car is sold, you will no longer have to contribute to insurance and car payments.
Tighten That Budget
Your ability to save will be largely driven by how determined you are to buy a home. You can tighten those purse strings by taking drastic measures or choose to save in the areas that won’t interfere too much with your lifestyle. However, the more areas you reduce spending in, the sooner you can accumulate your down payment.
Some good areas to find savings include:
Stream movies instead of going out to the theatre
Dine in more often to save on take out and restaurants
Try clipping coupons and using more Groupon offers
Invest less in costly hobbies
Stop building your wardrobe and shoe collection and stick to needs
Stop paying full price for everything
No more vacations, or at least stay closer to home
If you and your partner are both paying for the same music and movie services, share and account instead
Brown bag it for lunches and cut out those expensive specialty coffees
Stop paying for expensive spa, hair and grooming treatments when possible
The more diligent you are, the more you will see your savings grow.
Start Paying Cash
Even using Interac can lead to overspending. Instead of using your Interac card, start using cash. Set a weekly budget for yourself and take out that amount of cash from the Interac machine. Once that cash is spent, you’ve reached the limit of your budget. You’ll be surprised at how much money this approach can save.
Open a Tax-Free Savings Account
The Tax Free Savings Account (TFS) is the perfect solution for your down payment savings. You get a small amount of interest for the account, which is tax free. Your account allows you to track your savings and keeps the money more accessible when it’s time to make your down payment. Speak to your bank to discuss your TFS options.
Consider the First-Time Home Buyer Incentive (FTHBI)
This government incentive program might work well for you as the federal government will contribute up to 10 percent of the home purchase price towards your down payment. The contribution offered for the FTHBI is either 5 percent for a resale home or 10 percent on a new build home for homes priced at up to $505,000. You have to earn $120,000 or under in income to qualify. The cap is a little low if you are buying in large cities like Toronto and Vancouver where average prices are closer to $1 million. However, changes are being considered that will raise the cap to over $700,000. If the changes come into play, they will also raise the income requirements to $150,000 or less.
The one thing to keep in mind with this incentive, however, is it is a shared equity loan. That means that although the percentage contributed by the government is based on the current value of your home, when it comes time to pay them back, the percentage owed is based on the new appraised value of your home. You will have to pay them back more then what you borrowed in most cases. The incentive is paid back either at the time you sell your home, or at the maturity date of your mortgage, whichever comes first. For more information about this program, check out our recent blog Trudeau's First-Time Home Buyer Incentive.
If you have an RRSP you can withdraw up to $35,000 to put towards the down payment for your first home. You have 15 years to pay it back interest free. However, you can also leverage RRSPs as an excellent option to build your savings. Not only do you gain interest on your RRSP contributions, but you also get a tax credit that can increase your potential tax return. The return can then be put towards your down payment. Just keep in mind that if you don’t repay the money from a RRSP withdrawal you will have to pay tax on it as it becomes income.
These tips can help you build your down payment savings more quickly, so home ownership is within your grasp.