First-Time Home Buyer Guide: How to Save & Things to Consider
Buying your first home is an exciting milestone and arguably the largest purchase that most of us will make. It is important that we prepare financially to avoid feeling financially strapped once we get the keys.
Before I dive into this step-by-step guide on saving and purchasing your first home in Canada, I want to remind you of two things:
1. Just because some people view homeownership as one of the ways to determine success does not mean that it should be your primary reason behind buying a six-figure property. Make sure that this purchase is in line with your values and desires and something you are excited about.
2. You can build wealth without owning a home through other investments. Home ownership is not always the right choice for everyone, it largerly depends your ideal lifestyle.
1. Determine How Much You Can Comfortably Afford.
Start by figuring out how much you can afford, not what the bank is willing to pre-approve you for. Many first time homeowners fall into the trap of getting excited and jumping on the biggest pre-approval amount they can get from the bank.
The bank is thinking about the ris they are willing to take on, not your lifestyle. Here is a simple way to estimate what you can comfortably afford so that you don't end up house rich, cash poor.
Total household monthly income (after taxes)
subtract your expenses:
- fixed expenses (groceries, monthly phone bills, utilities, etc)
-your monthly saving/investing payment to yourself (after you purchase a home, there are many other things in life you will continue to save for)
-discretionary expenses for your the things that are important to you and aligned with your values (you want to make sure you can still afford to spend intentionally and do the things you enjoy doing)
-debt payments for any existing debt that you have (student loan, car payments, credit cards etc)
= the amount you can comfortably afford to spend on a monthly mortgage payment and other house costs like like property taxes, insurance, and maintenance.
2. Calculate your estimated down payment.
Your monthly payment that you calculated will help you determine the price range of the home you want to purchase. In Canada, purchasing a home between $500,000 and $1,000,000 requires a down payment of 5% on the first $500,000 and 10% on the remainder. Houses priced over $1 million require a down payment of at least 20% on the entire purchase price.
While 5% - 10% down is the bare minimum, you should strive for a 20% downpayment. You will avoid having to pay mortgage loan insurance with a downpayment of 20%.
3. Start Saving for your Down Payment
Begin by setting a savings goal and timeline. Open a separate savings account to keep your down payment funds.
If you are purchasing your First Home in Canada, I encourage you to open a registered account: First Home Savings Accounts (FHSA)
This account allows you to save up to $40,000 (the max contribution is $8,000 per year) to use toward your first home. There are two big tax breaks: any money you contribute to your FHSA reduces your taxable income for that year, and any gains your money makes won’t be taxed when you make a withdrawal.
Another option is a Tax-free Savings Accounts (TFSAs) don’t reduce your taxes when you make a contribution, but any gains you make on the money in your TFSA won’t be taxed when you withdraw the funds for your downpayment.
Automate your savings by setting up regular transfers from your checking account. This makes it easier to save consistently.
4. Improve Your Credit Score
Your credit score plays a big role in getting approved for a mortgage. Check your credit report so you know what you are working with and if you need to improve. Pay down high-interest debts and avoid opening new credit accounts.
5. Start looking at ways to mindfully cut costs.
While you are saving for a downpayment, it does not mean that your life goes on hold entirely. It does mean however that you need to find ways to cut costs to intentionally save to reach your downpayment goal.
Here are a few ideas to help you be mindful and start saving:
a) Meal Plan & Prepare: food is one of the biggest things we can easily overspend on when we are not prepared. Set a weekly grocery budget and meal plan for the week ahead!
b) Cancel unused/ rarely used subscriptions
c) Set a weekly budget for your discretionary spending and take it out in cash. Once it's gone, it's gone.
d) Reduce holiday spend this year
e) Get comfortable setting money boundaries and saying no. Here are a few ways to prioritize your goals & wellbeing:
- That's not in the budget right now, I'm saving for a downpayment
-Do you think we can find a more budget friendly option?
- I'm going to have to pass, I am prioritizing my spend elsewhere