Let’s be honest, most of us would prefer to own a home today, but that goal might be a few years away.

We are often asked: What should I be doing NOW so I’m ready in a few years? Here are a few tips.

 

1. Define your goal: Detached or Condo?

Defining this goal first will impact many other decisions along the way. If you want to live in a condo, for example, you won’t need to save as much of a down payment vs a more expensive detached property. You may reach your goal faster.

 

2. Save money like crazy! Sharpen your budgeting skills and embrace your inner cheapskate.

Saving money is challenging, and building your down payment will be one of the biggest challenges you face. In Ontario, for purchases up to $500,000, you can buy with as little as 5% down. Using $500,000 as the example, you would need to save a minimum of $25,000 plus legal fees. When working toward a large financial goal, it may be helpful to budget monthly instead of saving spontaneously. To save $25,000 in a two-year period, you need to save $1042.00 per month. It is wise to try to save a little more in case of a financial setback. Consider taking advantage of using RSP’s as a down payment plus a tax break.

 

3. Cut unnecessary expenses.

Do you eat out much? How many monthly subscriptions do you have? (Spotify, Apple Music, etc) Just these two items alone can cost several hundred dollars per month. Eliminate as many as possible and watch how much you can save!

 

4. Build your credit and keep it stellar.

Strong credit is critical to getting a good mortgage at a good interest rate, and you can do much to improve your rating in two or three years. Make sure you pay all your bills on time and never max-out credit cards or lines of credit. It’s also a good idea to periodically check your own credit rating using services like Equifax to ensure everything looks good. Example: Someone I know returned a book to the library and carried on with life. Years later, they applied for a loan and were denied! Why? Because the library misplaced the book and it was registered in his credit bureau as never returned… They corrected the situation when the library found the book, but only after the damage was done.

 

5. Pay down and avoid any unnecessary debt.

Financial institutions use ratios called GDS (Gross Debt Service) and TDS (Total Debt Service) to qualify you for a mortgage. Financial obligations, like a car payment or large credit card bills, could ruin your chances of home ownership. As of this writing, a $100,000 mortgage costs approximately $400 per month. When a lender analyzes your file, a $400 car payment will lower the mortgage amount you qualify for by about $100,000. That amount could mean the difference between buying a place you love instead of a fixer upper, or nothing at all.

 

6. Stay away from expensive rentals.

If you live with your parents, this will be less of an issue; but for those of you who are renting while saving up to buy a home, this can be another huge obstacle. Rental rates have skyrocketed in recent years, making it far more difficult to save up. Our advice would be to rent the least expensive place you can find that fits your needs, remembering that it’s temporary. If you rent a big fancy place, it will probably result in a delay to your dream of home ownership.

 

7. Stay on top of your taxes.

This is more important for self-employed individuals. We are responsible for holding back a portion of money earned to pay our own income taxes. Financial institutions require proof that all your taxes are paid and up-to-date.

Another important matter to address is the amount  of net income we claim on our taxes. Self-employed individuals have many write-offs available that lower taxable income, and it would be foolish not to take advantage of lower tax rates. The issue when shopping for a mortgage is that income can (on paper) look too low to qualify for a mortgage based on our “Notices of Assessment.” Be sure to speak to a mortgage broker about this as soon as possible, and consider temporarily using fewer of your business expenses as write-offs for the next two or three years, if that’s what they recommend.  There may be other solutions for you as a self-employed applicant as well.

 

8. Consider asking your parents to co-sign.

Many parents are helping their children enter the market by providing down payment assistance and co-signing on the mortgage. Having bought a home when prices were much lower, most parents now have lots of home equity and high-paying jobs. There is no shame in asking your parents for help if they are in a position to offer it. In today’s market there may be no other option.

 

9. Buying with a 5% down payment is ok!

Many buyers think you need 20% down to buy a home. If that were the case, an enormous sector of the population would never own a home. A 20% down payment is amazing if you have it, but all you need is 5%  for up to a $500,000 purchase price. If you buy for over $500,000, you will need 10% of the difference up to $999,999. If you plan to buy for $1,000,000 or over, you need 20%. Some think it’s better to wait and save 20%, but that thinking is flawed. How long would it take you to save $100,000?(20%) Using our calculations from above, it would take 8 years. In Hamilton, the market has increased a whopping 120% in the same period! It’s best to save 5% and let the market do the heavy lifting.

 

10. Prepare mentally to move farther away.

A common trend in recent years has been for first-time buyers to relocate to a less expensive market. Torontonians are moving to Hamilton to find more affordable options, and Hamiltonians are moving to Brantford and Niagara to do the same. As prices continue to rise, many are finding it necessary to move farther away to afford a home. Considering this early on might make it an easier change when the time comes.

 

11. Learn basic home repair skills.

Even if you buy a new condo, you will probably need to make small repairs around your home. Why not start learning how to do some now? These may include.

• Re-caulking a tub or shower.
• Painting walls and trim.
• Fixing a leaky faucet.
• Repairing walls before painting.
• Laying laminate floors.
• Outside yard maintenance.

etc.

The journey to home ownership is exciting! We hope you find these tips helpful in your preparation for home ownership. As always, contact us with any questions you may have with your unique situation. We are always happy to help.