Going From Renting To Home Ownership
By Marcia Luke
These days everyone seems to be making the transition from renting to buying. Many people are purchasing, be it their first home or their fourth. However, there seems to be a trend among young adults to move back home with their parents in order to save up for their initial down payment. This might be the result of an effort to balance a mortgage with school debts, or it could be due to the fact that housing prices have been steadily rising. It may even be that more young adults are buying on their own rather than waiting for a partner.
It’s not easy to make the move into home ownership, whatever the reason.
So what’s the best strategy to save for a down payment while maintaining other financial obligations? How do you divide the salary pie so that you’re in an optimal position when you purchase a home?
The most important thing to remember about the down payment is that you want it to be as big as possible. The bigger it is, the less you’ll spend in interest over the life of your mortgage. Also, if you have a minimum down payment of 25% of the purchase price, you’ll avoid paying mortgage insurance. That being said, you’ll need time to accumulate savings. While you want this process to go as quickly as possible, you don’t want to neglect other savings, such as RRSPs, emergency savings, or even a vacation fund.
The nice thing about saving up if you’re a first-time new homebuyer is that you can use up to $20,000 of your RRSP towards your down payment, provided that you repay the “borrowed” amount within 15 years. This option, called the Home Buyers’ Plan, allows you to save for retirement and, by loaning yourself the money temporarily, also your down payment.
What about the rest of the picture? You can assume that your housing costs and utilities will run up to 30% of your paycheque. This includes rent, cable, Internet, heat, phone, and hydro. Transportation costs will be approximately 20%, including fuel, insurance, parking, and regular vehicle maintenance. Count 15% for food and 10% for entertainment, and that brings you to 75% of the pie. Each person’s pie will be divided in a slightly different way, but you should have roughly 25% of your take-home salary left to save with.
Let’s say that you invest 15% of that amount into your RRSP to use towards your down payment. When you withdraw from your RRSP, you should also set aside a portion that will go toward closing costs, which will come to approximately 4% of the purchase price of your home. The other 10% can be divided between emergency funds and fun savings, such as for a vacation or a new TV.
Now your pie is divided—what’s next? As your savings accumulate, shop around to get an idea of what kind of home you want, where, and what features it will have. But also plan ahead so that you know how much your down payment will need to be. Knowing how much you can afford will help you determine the optimal down payment for your dream home. And when the time is right, make your move!
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Contact the Jeffrey Team for more information Â
