Putting a plan together

So you’ve been paying $2,000 a month in rent for years and you know you could afford a mortgage if only you had a down payment. Here are a few ideas to get started on planning for your home purchase.

Saving money while paying rent can feel like an uphill battle. There are ways to get the money together but it’s going to take time, dedication and prioritization. I’m not going to tell you to buy fewer lattes or stop eating avocados but cutting down on expenses is always a good idea. You can free up a few hundred dollars a month by making small changes to your lifestyle if you haven’t already. Get by with one car if you can. Cancel the cable and get a streaming service or two. Limit take out to once a week and cook more meals at home. Buy used when you can, this saves money and helps the planet. Tracking your spending for even a few months will shine a light on areas you can cut back on. There are many home budget apps available for free. This has been the most useful tool for me to manage my money and make my dollars stretch.

Pay off existing debt, especially credit cards. It’s hard to save when you’re paying interest fees every month. Start with larger payments on the highest interest credit card, maintain minimum payments on the others, then move to the next highest and so on. Your credit score is important but lenders also consider your debt to service ratio. That’s how much credit you have vs how much you are using. If you are already on the hook for a few hundred in minimum payments every month that will be taken into consideration when determining how much you can afford to pay on your mortgage. Paying your debt down will also help improve your credit score. So will using a credit card for everyday expenses and paying the entire balance every month. Sign up with Equifax or another credit monitoring company so you know where you’re at and watch the numbers go up.

You have an idea of the kind of property you want and the price range it’s in. Determine how much you need for the down payment plus closing costs. Banks require a 20% down payment for a standard mortgage. If you can’t make the 20% or don’t want to, you will be required to buy mortgage insurance. Mortgage loan insurance protects the lender if you default on a payment. The fee you will pay is called a premium, and typically ranges from 0.6 to 4.5% of your total mortgage cost. Note that this insurance is for the sole benefit of the lender. If your home’s total purchase price is less than $500,000, the minimum downpayment in Canada is 5%. If the price falls between $500,000 and $999,999, the minimum down payment is 5% on the first $500,000 and 10% on the portion over $500,000. If your home’s total cost is $1 million or more the minimum down payment is 20%. However, if you have poor credit history or are self-employed, your lender may require a larger down payment. Talk to a mortgage broker as early as possible to determine how much money you need to save and what interest rates you are eligible for. A good mortgage broker will advise you on the best ways to build credit and reduce your interest rate.

You’ve probably heard about the first-time home buyers program. This allows you to withdraw funds out of your RRSP tax-free to build or buy a qualifying home. To benefit from this program you must be a first-time home buyer, or not have owned a home you are living in as a primary residence for the last four years. You are allowed to withdraw up to $35,000 and you must occupy the home within one year of buying or building. Your funds must be in the RRSP for a minimum of 90 days. You do have to pay the money back within 15 years starting from no later than 2 years after you withdraw it. On a $35,000 withdrawal that equals $2,333 per year or approximately $200 per month. If you miss a year, the government will consider the missed payment income for the year and you will be taxed on it. You may choose to put your money in a tax-free savings account (TFSA) instead. There are no withdrawal limits and you won’t have to repay the money. Funds in your TFSA account are considered post-tax so there is no income tax charged when you withdraw or on any gains realized. However, many have annual limits, talk to your bank about the specifics.

Invest in rental properties in small communities. If you can get $10,000 together you have enough down payment for a $200,000, 2 bedroom apartment with an insured mortgage in a small town outside the city. Yes, they do exist. With today’s mortgage rates, your monthly payments will be below what you can collect in rent. Let your renter pay the mortgage and put any residual income into your TFSA or RRSP. Since it’s a rental property you can still take advantage of the first-time home buyer’s program when you sell it to buy a home to live in. Many towns on Vancouver Island are taking off, talk to your realtor about where the best investment for your money is.

Remember there is more to purchasing a home than just the sale price. Talk to your realtor about closing costs, legal fees, home inspection fees, property transfer tax, and when GST is applicable. Getting ready to purchase a home takes planning and commitment, but it is doable. Talk to your realtor, mortgage broker and financial advisor to put a plan together and stick to it.