You may be renting right now, but we know you’re quietly dreaming of one day owning a home of your own. It’s a goal many renters strive towards and we’ve outlined the pros and cons of renting vs. owning. But with the high cost of rent in many parts of Canada and the thought of saving enough for a down payment, the dream of home ownership can sometimes feel impossible. However, there are ways to save for a house while renting. If you’re intentional with your finances, have a solid plan and are willing to sacrifice, owning a home may be more possible than you may think.
First off, understand the costs involved with buying a house. The biggest cost when purchasing your home will be your down payment. Since you won’t be paying hundreds of thousands of dollars flat out, you will need a mortgage loan, and your down payment on a house is the upfront payment that you have to put down in order to secure that loan. In Canada, you need to pay 5% for your down payment if the house costs $500,000 or less. If it costs more than $500,000 and up to $999,999, you must pay 5% on the first $500,000 and an additional 10% on the amount between $500,000 and $999,999. If the home is $1 million dollars or more, then you must pay 20% of the cost for your down payment.
Your down payment can also impact how much you pay for your home overall. A larger down payment decreases the amount you have left to pay on your home. If you have a home that costs $500,000 and you put 5% down, you’ve put down $25,000 up front and have a remaining $475,000. The outstanding amount ($475,000) is the principal for your loan. In addition to paying down the principal, you also pay interest on the principal at a rate negotiated with your lender (likely your bank). With a 5% down payment, you’re paying interest on $475,000. However, if you put down 20% on that same $500,000, the principal for your loan would be $400,000, ultimately decreasing how much you’re paying in interest.
Mortgage insurance is another thing to consider with saving for your down payment. If your down payment is less than 20%, you’re required to purchase mortgage insurance. Unfortunately, this insurance doesn’t protect you, it protects your lender in case you cannot make your mortgage payments. That means that if you’re self-employed or have poor credit, you may still need to purchase insurance, even if you put down 20% for your down payment, to secure your loan. You’ll have to pay a premium for the insurance, and you can either add it to your regular mortgage payments, or pay a lump sum up front. If you add it to your mortgage, then you will also pay interest on your insurance.
So how much do you need to save? That depends on how much you want to pay up front and how much your house costs. The Canadian Real Estate Association (CREA) puts the average price of a home in Canada at about $528,000. A 20% downpayment on that amount is $105,600, whereas a 5% on the first $500,000, and 10% on the remaining amount, you’re looking at around $30,000. Homes in more expensive areas like Toronto cost over $800,000 and you would require much more for your down payment.
There are also other costs associated with buying a home that you may need to think about. For example, closing day costs usually include legal fees if a lawyer is looking over the contracts. You might also need to pay a land transfer tax before the sale closes to transfer the property into your name, which is a percentage of the home’s purchase price. Other costs could include home inspections, appraisals and municipal taxes. Depending on where you live, you might be able to get exemptions or rebates for these costs, or you might need to pay them before your sale closes.
Wherever it is you decide to purchase a home, make sure to do your research on programs and rebates that could help you. The federal government introduced the First Time Home Buyer Incentive in 2019. If you’re buying a home for the first time and have a household income of less than $120,000 you might qualify. The incentive is an interest-free, shared-equity loan from the federal government. In addition to the national incentive, different provinces offer their own rebates and grants for first time home buyers that might help you pay for your first home.
Understanding what costs you’ll need to pay will help you set an accurate savings target and plan accordingly. You’ll need to figure out how much homes cost in your area, what you’re comfortable spending, and what’s reasonable given your income and ability to save.
You can’t figure out where you’re going unless you know where you’re at. The first step to saving enough to buy a house is understanding your current financial situation.
Develop a budget to get a clear idea of where you stand. Take a look at our post on how to budget while renting to help you get started. Do you already have some savings put aside? Even if it’s not thousands of dollars, it still matters. Any amount is a step in the right direction to start growing your savings.
Knowing that your credit score can affect your ability to get a mortgage, your interest rate and your mortgage insurance, focus on paying down any debt that you have first. How much debt are you in? Are you still paying off school debt? Do you have a credit card, or have taken out a loan? On top of knowing the total amount of debt you owe, you’ll need to understand the interest rates on these debts. Paying 10% interest on a $10,000 loan is much different to paying 20% interest on that same loan. Understanding how much interest you’re paying will help inform how you strategize your debt reduction.
Start with your debts with the highest interest rates, and work on paying those off first. Credit cards usually have the highest interest rate and most financial institutions will require you to pay off any credit card debt before you qualify for a mortgage. After you’ve paid off that debt, you can use the money you were spending on those higher payments to service your remaining debt. From there, you can figure out how much you can afford to save
Check out our post on how to save while renting to make the most of your money, like opening a TSFA or RRSP. Options like TSFAs and RRSPs are great for saving for a home since you can save for the long-term while keeping your money accessible. First-time home buyers can withdraw up to $35,000 from their RRSPs tax free with the Home Buyers Plan as long as it’s going towards the purchase of their first home.
If you’re having difficulty laying out your finances, consider speaking to someone at your financial institution. Even if you’re comfortable reviewing your finances yourself, having a professional help you through the process might reveal some points you missed or provide you with information you didn’t consider.
Before you get too ambitious, remember that your savings goal should reflect your lifestyle. That means you’ll need to be able to keep this up until you reach your goal. So if you know it will be impossible to only spend $100/month on entertainment, don’t set yourself up for failure.
That said, you are trying to save for a home. And if you’re serious about it, a change in lifestyle is a sacrifice you should be willing to make.
If your savings goal is $30,000 and you’re saving $700/month, then it’s going to take about 42 months or three-and-a-half years to get there. On average across Canada, it takes 13 years to save for a house, if you’re saving 20% of your income (for ages 25-34). This is why when opportunities like income tax refunds or even getting a raise at work come along, it’s a good idea to add those amounts to your savings. It will help fast track the process.
Once you have your current monthly costs figured out, ask yourself this: is there an opportunity for you to earn more money? Think of ways you can use your skills or talents to earn a side income. Maybe you have the time to take on a gig like driving a Lyft or Uber or doing some bartending at a local pub. An extra couple hundred dollars a month can go a long way towards getting you closer to a minimum down payment for your home.
Get rid of cable — Between Netflix, Disney+, Apple TV and YouTube, there are too many streaming options for you to still be paying hundreds of dollars each year on cable. Use those platforms to watch your favourite shows and get rid of your cable bill.
Cut back on the social stuff — We know it’s hard to turn down after work drinks or weekend brunches, but you’re on a mission to buy a home. That’s going to take some sacrifice.
Instead, investigate activities available in your city or town that are free or cheap.
Get a roommate — Getting a roommate is a big one because it helps with one of your fixed costs. You’ll essentially be cutting your rent and other household bills in half. Find someone you can get along with and buddy up.
Find ways to lower other household costs — If you’re paying utilities, try your best to keep the lights off and conserve your water usage. Do laundry during off-peak hours and hang-dry your clothes.
Work from home — If it’s at all possible to do your job from home one or two days a week, speak with your employer to make that happen. Canada Mortgage and Housing Corporation (CMHC) says the average commuting cost in Toronto is less than $200/month. If you live outside the city in one of its suburbs, that cost can balloon up to $600/month. Working from home twice a week leads to major savings over the course of a year.
Get Digs provides the flexibility to pay your rent with your rewards credit card card and earn points, allowing you to put the points against expenses that matter most to you, so you can continue to do more with less!
This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.