5 ways to save for your first home

With rate hikes paused for the time being, and a potential policy reversal from the Bank of Canada on the way next year, it’s seeming like the housing market is gearing up to return to the norm. While some were hoping that the real estate market in Canada has been a bubble waiting to pop, the market is already rebounding in some areas and prices are still above 2020 levels. 

It can be stressful to watch as housing prices increase year after year alongside the cost of living, especially when family or friends already on the property ladder are seeing massive gains, with access to more and more equity.

If homeownership is a goal for you (and there’s plenty of reasons it should be), there are a number of ways you can get ahead and speed up your path to owning a home.

Here are 5 things you can do to help you afford your first home.

1. Contribute to a First Home Savings Account

This year the government of Canada launched a new tax-advantaged savings account aimed at helping Canadians save up for their first home. The First Home Savings Account (FHSA) is the best of both the TFSA and the RRSP with a larger contribution room to boot. 

If you contribute the maximum amount allowed each year, which is $8,000, you can contribute a total of $40,000 over the course of five years.

The best part about the FHSA is that it’s not only tax-free like the TFSA for contributions, but also the contributions can be deducted from your income, similar to an RRSP and reducing your income taxes for the year.

There’s little reason not to take advantage of the FHSA if you plan on buying a home within the next 15 years. Maxing out your FHSA to help save up for your down payment is one of the best things you can do to help you afford to get on the property ladder. Letting that $40,000 compound at 10% annually over 10 years if you invested it in the market would have you end up with a little over $100,000 to put toward your down payment, and it’s all tax free!

2. Live frugally

While it might go without saying that budgeting effectively and managing your debt is essential to your financial plans, your savings rate is arguable one of the most important factors in being able to afford a home. The importance of your savings rate is hard to understate considering even someone with a mid 6 figure salary will be unable to afford a home if they live paycheck to paycheck. When it comes to investing, your asset allocation is only as good as your savings rate. One of the most powerful tools available to you to help you save for a home might be living with your parents a few years longer and saving most of your income. Let’s say you have a take home salary of $50,000 and can minimize your expenses as much as possible by living with your parents for 2 years, investing nearly all your income. Those two years of savings should be worth over $400,000 after 15 years when it comes time to use up your FHSA (assuming a 10% annual rate of return from investing in a market ETF). In this way, even if you never save another penny after the first two years, you’ll be set for your down-payment and then some. If you happen to live in a lower cost of living city, these numbers might be way higher than necessary, allowing you to purchase your home even quicker.

3. Use the Home Buyer’s Plan

Before the FHSA was around, the Canadian government implemented the Home Buyer’s Plan (HBP) with a similar goal. The Home Buyer’s Plan allows you to withdraw up to $35,000 tax free from your RRSP. Normally contributions to an RRSP are taxed at your marginal income rate and are subject to early withdrawal fees if taken out before you turn 60. Contributing to 

4. Consider house hacking

If you’ve crunched the numbers on your savings rate and things still aren’t aligning for you to afford the home you want, another way you can stretch your budget is by house hacking. If you’re unfamiliar, it may sound like some high-level technique for real estate investors, but house hacking is extremely commonplace. It simply involves renting out a portion of your home to help offset some of the expenses of homeownership.

Recommended reading: What is house hacking?

There are many different ways you could house hack depending on the property you end up buying. A common way to house hack is to purchase a duplex, living in one unit and renting the other. It’s important to crunch the numbers and see what your monthly budget would look like, as the bigger the property you buy the more expensive it will likely be. 

Another option is to purchase a home with a furnished basement and rent that out as a unit. You’ll need to check in your specific municipality the rules around renting a suite like this, for example you may need a separate entrance or two by law. 

Yet another option that’s popular is to live in the basement yourself until your budget allows you to move into another place. You could also rent out individual rooms in your home as it’s becoming increasingly popular to do among rising prices in the cities. Make sure you’re okay with having roommates if that’s the route you plan to go!

House hacking doesn’t have to be a forever situation either, for example if you just need a little help in the first years of homeownership while your career is still ramping up, you can always change things up later on as your financial situation changes. 

5. Research your mortgage

Finally, a surefire way to save thousands of dollars in housing costs is to spend your time evaluating your mortgage options. An 0.5% difference in interest rates can add up to over $50,000 difference over the life of a 30 year 800,000 mortgage. Often times first-time home buyers aren’t familiar with the mortgage market or process and tend to go with the first option available. Shopping around with a mortgage broker to choose the right lender rather than going with a bank which only offers their products can end up giving you a huge edge and help you afford your mortgage earlier than would be possible otherwise.

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