Ah, yes, down payments.
That oh-so-essential yet oh-so-daunting aspect of home ownership. In a way, the notion of a down payment can feel downright impossible. After all, how are we expected to save such a large degree of money whilst also tending to rent payments, credit card bills and that Bachelorette party we just RSVP’d to in Vegas?
Of course, there’s no denying that saving for a downpayment is difficult. But, there’s also no denying that it’s entirely possible. Let’s delve into this a little further.
Renting Versus Owning
In reality, many renters will find that what they’re paying in rent closely resembles a prospective mortgage payment.
Let’s consider a condo that rents for $1800 per month and has a purchase price of 489K. While the rent is $1800 a
month, a monthly mortgage payment could be as low as $2100. This is assumed with a 25-year amortization, a 5% downpayment and an interest rate of 2.39%. These are all very general and fair terms.
In this scenario, a mortgage payment is only $300 more than a rent payment. Of course, this is on top of a 5%
downpayment which equates to in and around $25K for a condo at this price point. However, it is important to note that any purchases with less than a 20% down payment will be subject to mortgage insurance.
Now, let’s bring our attention to realistic ways to make saving for a downpayment easier.
Know Your Goals
If you’re going to be saving for a downpayment, you want to know exactly what your savings goal is.
The best way to find out exactly how much you need to save is to speak with a mortgage broker. Once you come to a general consensus as to what kind of mortgage you can afford, you’ll then learn what kind of downpayment is required for that level of mortgage.
Once you have a generalized idea as to how much a downpayment will cost, you can develop a more specific savings plan.
Bunk up with Family
Living with family past a certain age can be a tough pill to swallow. This is certainly a fact that is not worth disputing.
But, even living with your parents, extended family or sibling for one year could result in saving enough money for a downpayment. Let’s again consider the example of a condo rental that is costing $1800/month. In forgoing this rental payment for only one year, you can save upwards of $21,000. This is nearly enough for a downpayment on a property with a purchase price of $489K.
For this degree of savings, maybe bunking up in Aunt Doreen’s spare bedroom isn’t so bad after all..
Create a Separate Savings Account
It’s time to set up a house fund. We’re not talking adding money to a savings account every so often. Instead, this is a house specified savings account. Each month, you’re going to commit to making a minimum deposit into this account.
One of the best ways to do this is
to set up an automatic transfer from your chequing account to your house account on a monthly basis. While this may feel like a huge hit at first, rest assured that it’s going to get easier. After a few months, you’re going to become used to these payments and adjust your spending accordingly.
Rent a Room or a Parking Spot
If you have any extra space within your home, why not consider renting it out?
Sure, you might have to deal with an extra body floating around your personal space, but the financial rewards are
certainly worth it.
It’s up to you whether you choose short-term accommodation such as Airbnb or more long-term accommodation such as finding a roommate. In many cities, short-term accommodation can actually be more profitable. This is because you can take advantage of renting rooms out for increased pricing during certain times of the year.
In major cities such as Toronto, even renting a parking spot is going to provide you with a few hundred dollars of income each month. Let’s consider that the average cost of a downtown parking spot is hovering around $200/month. If you have a parking spot that’s collecting dust or only being used rarely, advertise to neighbours that it’s available for rent.
Lean on Your RRSP
Here in Canada, the government is looking to make it easier for first-time homebuyers to get into the housing market. This means that first-time homebuyers can borrow up to $25,000 from their RRSP to be used towards their downpayment. While you do have to pay this money back, you have a period of fifteen years to do so.
It’s Time to Start Saving
At the end of the day, there’s no denying that saving for a downpayment can be a long and painful process. But, when you’re no longer paying rent to your less-than-stellar landlord, you’re going to be happy that you bunked up with Aunt Doreen. Now, you have a place to call home and an ever-growing asset.
Ready to start your home search? Visit Nobul now.