The buying process might appear straightforward to any first-time buyer— you find the house you love, sign on the dotted line and get the keys. But prior to those months of browsing MLS and late-night offer negotiations, are months —even years— of carefully coordinated financial planning, budgeting and discipline.
Financially preparing for homeownership can never happen too early. It can take over eight years for some Toronto residents to save enough for their first down payment. For other new buyers, it can only take eight months—savings timelines hinge on a number of factors. We asked Andrea Jolly, a broker and Lead Planner at Mortgage Architects, and Dan Washington, a financial advisor at Raymond James Limited, to dish out their best advice for first-time homebuyers on how they can plan ahead for their real estate dreams, no matter when you’re planning to buy.
1. Forget whimsical budgets and tell your money what to do
When Washington begins a savings plan for a client thinking of homeownership, one of the first things he evaluates is their spending habits.
“If they’re renting now or living at home, there’s a lot of latitude in the money that they’re bringing in for some discretionary spending,” he says. “If that’s not well controlled, that it can be tough for one to achieve homeownership and excel in it once you’re there. It tends to speak for a large portion of our paychecks.”
Washington is not a believer in ‘whimsical budgets’—the kind where untamed spending creeps in and eats up your savings. Instead, he recommends setting a budget where every penny is accounted for and has a purpose. As a result, you’ll have the ability to alter your budget when needed more easily, creating more intentionality in your spending.
“You can adjust the plan in the month. If you overspend a little bit on groceries, you’ve got to cut from somewhere else,” says Washington. “Essentially, you want to achieve more or less what your plan was for the money. It’s about telling your money what to do.”
Setting up a monthly automatic transfer of funds into your savings account should also help you to get more familiar with allocating a portion of your budget to your homeownership fund.
“Once you get used to that money disappearing and not being there, you’ll get comfortable with it not being there,” says Washington. “And yet, a year later, you’ll have $12,000 saved up.”
2. Keep tabs on your credit
Jolly has worked with clients who have no credit history at all, meaning they’ve steered clear of credit cards and loans. While this may sound like a sure way to prevent debt pitfalls, Jolly explains that having credit history and up-to-date knowledge of your credit score is instrumental to getting pre-approved for a mortgage down the road. A balanced credit score with healthy spending limits allows brokers to provide flexibility in their mortgage rate offerings.
“When you have a credit score over 680, we are allowed to use extended ratios and affordability,” says Jolly. “It gives you a little bit more room because you’re trusted with your credit. It’s not just score. It has to make sense. If you only have a $500-limit Visa, but your score is 700, it’s not enough for a lender to judge you on.”
Jolly not only recommends paying your credit balances off frequently, but to check your credit score twice a year. In doing so, you can screen for errors that can hamper your credit history.
“You’d be shocked at how many errors are on a credit report,” she says. “At one point, I had three mortgages listed, and I only had one property!”
3. Learn what the right kind of debt is
As many as 18 per cent of Canadians have delayed major life milestones because of their debt. The specific type of debt you owe can impact how much a mortgage lender would qualify you for. Washington warns that consumer debt, like high balances on your credit card, could indicate that you’re prone to overspending.
“If you’re a Millennial and you have credit card debt that you can’t pay at the end of the month, or a line of credit that you couldn’t pay outright completely, that’s a symptom that you’re not living within your means,” says Washington. “It’s not that disastrous when you’re still living at home, but if you’re renting and you can’t pay your rent that’s an issue. If you can’t pay your mortgage, that’s a bigger issue.”
Healthier forms of debt, such as student loans, are tolerated and viewed more as a personal investment to your future.
“You’ve invested in yourself,” she says. “However, if you’ve maxed out the bank credit card and your Canadian Tire Mastercard, that’s a concern. It’s about walking that balance.”
Washington explains that it’s only an ideal to have no student debt prior to homeownership. Instead, he advises to focus on building your down payment and to avoid costly, high-interest consumer debt.
4. Tunnel vision will cost you
When a down payment can run you thousands of dollars, it’s easy to get savings tunnel vision and forget about other important home expenses.
“A lot of people, when they get down to the down payment stage, take all of their savings and throw it into the house,” says Washington.
If a roof leaks, or a bathroom pipe explodes, you no longer have a landlord to pay out for the repair: it’s the homeowner’s responsibility. Hence, Washington reminds prospective homebuyers to also build a healthy rainy day budget in the event of a home emergency. Tucking your savings away in a TFSA, he says, should help keep those funds for life’s surprises.
5. Test drive your mortgage
As part of preparing for the financial tightness of homeownership, Washington suggests working with the disposable income you’d have under a mortgage. By testing the budget beforehand, Washington says it will determine if a client is comfortable with the financial constraints of a home.
“I like people to set themselves up as if they own the house today so all the money that would be going towards the house, [we would] essentially make that their savings today, so they can feel what it’s like to live on the remainder,” says Washington. “It either confirms that they want to own a home, or they say, ‘I don’t want to be house poor.’”
Jolly calls this “test driving your mortgage,” whereby playing out your future lifestyle will help you figure out what you can comfortably afford pre-mortgage.
“If you know you’re not buying for three years, this is the time to set yourself up for that eventual purchase,” she says. “And while three years feels so far out, it really isn’t.”