Saving for a down payment is a crucial step in the home-buying process, and it’s often where many people get stuck, especially with constant negative news about affordability and rising costs. However, this advice applies to anyone across Canada, not just those in Toronto.
For properties priced at $500,000 or less, you’ll need a 5% down payment. For example, if you’re buying a small studio in downtown Toronto for $475,000, you would need $23,750 for the down payment. This is a manageable amount to save for with careful planning.
The down payment requirement changes for properties between $500,001 and $999,999. You’ll need 5% for the first $500,000 and 10% for the above amount. For instance, if you’re purchasing a one-bedroom plus den condo with parking for $750,000, you’ll need $25,000 for the first $500,000 and an additional $25,000 for the remaining $250,000, totalling $50,000. For properties priced at $1 million or more, the down payment requirement jumps to 20%. So, if you’re buying a starter home in Leslieville for $1.2 million, you’d need a hefty $240,000 for the down payment. This significant increase emphasizes the need for a solid savings plan.
To reach these savings goals, consider setting up an automatic savings plan. You must be disciplined with your savings and create a budget you stick to. Given the current economic climate, with high costs and inflation, it might be necessary to find additional sources of income, such as a part-time job, to accelerate your savings. By implementing a rigorous savings strategy and staying committed to your financial goals, you can overcome the challenges of saving for a down payment and move closer to owning your home.
One concept that often gets overlooked is the property ladder. For many, a million-dollar property feels out of reach without substantial help from parents or a significant financial windfall. According to a study by Zoocasa, the median salary in downtown Toronto is around $90,000 a year. Saving $200,000 for a down payment on a million-dollar property could take 30 years, by which time that property might be worth over $2 million.
So, a practical approach to overcoming this challenge is to start small and climb the property ladder. Consider purchasing a studio apartment for $500,000 or less, requiring only a 5% down payment. Moving into the studio and living there for a few years means you can build equity and pay down your mortgage instead of renting. This strategy positions you to buy a larger property in three to four years. This long-term planning is how previous generations have navigated the market, and it’s a viable way for many to get started today. For young people without significant resources, entering the market at a lower price point and working their way up is crucial for building net worth.
While some are wary of pre-construction, it is also worth considering. Resale properties are currently more affordable, but pre-construction offers unique advantages. One significant benefit is the ability to stagger deposits over three to four years, making the saving process more manageable. There are also excellent incentives available in the pre-construction market right now. Pre-construction forces you to save in small increments, which can be helpful if you struggle with budgeting. Although it might be more expensive per square foot than resale, the staggered deposit schedule can make the process more manageable.
By climbing the property ladder and considering pre-construction options, you can gradually move towards owning your own home. It’s all about starting with what you can afford, building equity, and making smart financial moves to advance over time.
Enhancing Your Savings: Family Contributions and Co-Buying Strategies
Another strategy is to talk with your parents or family. Is there anyone who can help boost your savings? Many of our clients receive assistance from the “bank of mom and dad,” there’s no shame in asking for help. Only some have this option, but it’s worth the conversation if your parents or another family member can contribute or top up your savings. You might arrange to repay them once you’ve built equity or sold the property. This doesn’t have to be a gift—it could be a low-interest loan. Structuring the terms to make it fair for both sides can make this conversation more straightforward.
Additionally, consider talking to a trusted friend. Co-buying a property and sharing costs 50/50 can be a smart way to enter the market. Ensure that a transparent contract with a lawyer is drafted outlining each person’s share of the partnership. This method requires trust and clear communication but can be a viable option for those who can’t do it alone. Exploring these options can provide practical solutions to help you start your real estate journey.
Leveraging Available Resources: Incentives and Financial Planning Tools
When starting your research, numerous resources and incentives exist for first-time home buyers. When speaking with your mortgage broker and financial advisor, make sure to discuss the following options to see if any apply to you:
- Federal Home Buyer’s Plan (HBP): You can withdraw money from your registered retirement savings plan (RRSP) to purchase or build a qualifying home.
- First Home Savings Account (FHSA): You can save up to $8,000 per year tax-free, with a lifetime limit of $40,000, towards purchasing your first property.
- First-Time Home Buyer Tax Credits: These credits provide various benefits after purchasing your first home. For instance, first-time buyers can claim up to $10,000 of the home’s purchase price on their tax return under the Home Buyer’s Amount.
- Land Transfer Tax Refund: First-time home buyers in Toronto can receive a rebate on the municipal and provincial land transfer taxes, which must be paid in cash at closing. This refund can significantly reduce the upfront costs.
Many people need to be aware of these programs, but they can be valuable tools in your long-term financial strategy. Utilizing these tax-free shelters and incentives can make the process more manageable.
Additionally, working with a financial advisor who understands your goals can provide tailored advice on preparing your finances for real estate. However, finding a creative and real estate-friendly advisor is essential, as many may still need to appreciate the value of property investment fully. A good mortgage broker might recommend a financial advisor who can help you integrate your financial planning with your mortgage strategy. This teamwork can set you up for long-term success and make the home-buying process smoother!
Remember, purchasing your home can be a powerful step towards financial stability and growth. By taking advantage of these programs and working with the right professionals, you can overcome the challenges and achieve your real estate goals. When working with a mortgage broker, it’s worth asking if they can recommend a financial advisor to help you navigate and leverage various programs based on your income. This collaboration can be incredibly beneficial.
Managing Your Credit: Steps to Check and Improve Your Credit Score
Another major hurdle is checking your credit report. A mortgage broker can assist with this, or you can use various online platforms to run your report. Your credit score will significantly impact your mortgage application, so knowing where you stand is crucial.
It’s surprising how many people need to be made aware of their credit status, and many have poor scores without realizing it. For instance, a missed Visa payment from 2019 can affect your score today. Review your credit report for any errors and dispute them if necessary. This process takes time, so start early and read the report thoroughly.
If your credit score is low, work on improving it. This usually involves paying off debt, keeping credit card balances low, and avoiding additional debt. Sometimes, younger buyers or recent immigrants may not have a bad rating but lack a credit history. Consider getting a couple of credit cards, using them responsibly, and paying them off each month to build a credit track record.
These steps can help you achieve a strong credit score, positioning you better for your future mortgage application.
Building an Emergency Fund: Preparing for Unexpected Costs
Another important consideration is to build a contingency plan or an emergency fund. While saving for your down payment is crucial, additional costs are associated with buying a home, such as land transfer taxes, legal fees, moving expenses, and potential repairs. A good rule of thumb is to have an additional three to six months’ worth of living expenses set aside to cover unexpected costs. This way, you won’t be caught off guard by extra expenses right after purchasing your home.
Statistics show that a significant portion of the population lacks sufficient emergency savings. For example, about 45% of people in the US have less than $1,000 in an emergency fund. The situation is likely similar in Canada. An emergency fund is essential to cover unexpected events, especially when committing to a mortgage. The COVID-19 pandemic highlighted the importance of having a financial safety net.
In addition to an emergency fund, consider having a line of credit available for emergencies. This can provide a short-term cash flow solution if needed. It’s wise to secure credit when you don’t need it, as it may be challenging to obtain once you do. Having these financial buffers in place helps cover unexpected costs and ensures that you can continue paying your mortgage and meet other living expenses during unforeseen circumstances. This preparation will give you peace of mind and stability as you embark on your home-buying journey.
Frontloading Your Education: Researching and Understanding the Market
We strongly emphasize the importance of frontloading your education. It might sound cliché to “get educated on the market,” so what does that mean?
Buying real estate, especially for the first time, can be an emotional roller coaster. It’s one of the scariest and most tumultuous experiences you’ll encounter. That’s why we advise everyone, even seasoned investors, to do their research upfront when emotions aren’t in play. If you plan to buy a property in a year, identify the area you want to live in. Learn as much as you can about the buying process, understand how the market works, and explore why buying a year from now might be a good idea for the long term. Assemble a team of trusted advisors you can rely on and educate yourself thoroughly. This preparation will help you feel more confident when it’s time to make that big purchase.
Familiarize yourself with the terminology and steps required to buy a property. This knowledge will boost your confidence during what can be a nerve-wracking time. If you find yourself scared or confused, remember you’re not alone. Almost everyone experiences some level of anxiety during the process. By doing the work upfront, you can mitigate much of the stress and position yourself to make logical, rational, and smart long-term decisions. Understanding concepts like modern monetary theory, currency devaluation, and the value of hard assets, or considering factors like the greenbelt, construction pipeline in the GTA, and immigration and demographics, will give you a strong foundation. When the time comes to start looking seriously, you’ll have done so much research that you’ll feel prepared and confident. You’ll be able to make the best decision for yourself because you took the time to educate yourself and remove the uncertainty from the equation. You won’t learn this in school; your parents likely can’t teach you either. It takes courage to take that leap of faith, and while there’s some risk involved, it’s incredibly rewarding and empowering.
Attending workshops and seminars can be beneficial, provided they’re reputable and locally based. Be wary of programs that seem more focused on taking your money than providing valuable information. Seek out free resources like YouTube, where local experts often share great advice. Avoid relying too much on US content, as their real estate system differs significantly from Canada’s. Stick to local information relevant to your area—whether that’s Calgary, Halifax, or Toronto.
Taking the Next Steps: Assembling Your Real Estate Team
Now, you’ve done your due diligence. You’ve spoken to strategic partners, figured out your finances, and set up a savings plan. You might have started a part-time job and are working on improving your credit score. You’re listening to informative podcasts and ready to move into the next phase.
By taking these steps, you’re preparing yourself for a successful real estate journey. Keep educating yourself, stay informed, and trust that your efforts will pay off in the long run. Hiring a good real estate or buyer’s agent is a crucial next step in your home-buying journey. But where do you start? It’s essential to interview multiple agents instead of working with the first one you encounter. There’s a significant difference between a highly experienced, competent agent who can guide you through the process and advocate for your best interests and someone who’s just looking to make a quick transaction or needs more expertise. Statistics show that 75% of first-time buyers only interview one agent. Don’t make that mistake!
Do your research: look at online reviews, check their online presence, and speak to a few agents. Find someone you can communicate with openly, with the experience and tenacity to advocate for you. Consider working with a strong team. In many markets, top-performing agents work as part of a team. A team can offer more comprehensive support and ensure your interests are well-represented. As part of your process, assemble a team of trusted professionals: your real estate agent, mortgage broker, accountant, financial advisor, and even a contractor. This team will support you through the daunting process, giving you the confidence to move forward. Starting early with assembling your team is wise. Don’t feel embarrassed if you’re not ready to buy for another year or two. Casual conversations with potential team members can help you get your ducks in a row. Ensure that you feel comfortable with your team; you should be able to ask questions without feeling stupid and trust them to have patience and understanding.
