Now is the time to think like an investor and see the bigger picture.
Homeownership may seem like a pipe dream for many Canadians, especially millennials and Gen Z. With inflation, rising home costs, and job insecurity, it may seem like you can't catch a break. But if you've resigned yourself to renting forever, don't, because there's still hope.
While it certainly requires some discipline, you can turn from a renter into a buyer and experience the amazing feeling of hopefully never dealing with a landlord again. Here are six steps you can take to become a homeowner.
Step 1: Consistently put money aside for a down payment
Yes, it’s easier said than done, especially when you're paying rent in an expensive city like Toronto or Vancouver. But, consistently putting money in a tax-free savings account (TFSA) or a Registered Retirement Savings Plan (RRSP) can make it easier to reach your savings goals.
As a first-time home buyer, you could be eligible for the Home Buyers' Plan (HBP), which allows Canadian home buyers to increase their down payment by withdrawing up to $35,000 (up to $70,000 if you're buying your home with someone else) from your RRSP. The HBP allows you to access your RRSP tax-free, as long as the amount is paid back on time.
In fact, in 2023, you’ll also be able to start saving in a Tax-Free First Home Savings Account.
With this in mind, increase your contributions by either saving more money or by making more. Take a look at your costs and see where you could save—could you move in with a friend or family member to save on rent? Or, could you take a look at potential opportunities to make money, like turning your passion project into a lucrative side hustle? Keep in mind that when putting money away, every little bit helps.
Step 2: Be realistic about the home you can afford
Being realistic about the type of home you can afford may be a humbling experience. Still, it's better to look at your overall affordability early in the process to avoid the heartbreak of falling in love with a home only to realize it's way out of your price range. You can use a tool like an affordability calculator to see what type of home you could realistically afford.
Now is the time to think like an investor and see the bigger picture. Don't think of your first home as your forever home because it likely won't be your dream home. Look at different types of homes, like condos, townhomes, and apartments, and adjust your location (if you can) if you're still getting priced out of your area.
You'll also want to make sure you pass the mortgage stress test, an assessment to determine your ability to pay your mortgage. Speaking with a mortgage advisor is also helpful at this step, and Pine can help answer your mortgage questions.
Step 3: Understand all the costs of buying a home
So you've saved up for a down payment, and you know how much you can afford—congrats! Unfortunately, that's just one piece of the cost of homeownership.
When you're a renter, your landlord takes care of any fixes that your home may need. But when you're a homeowner, it's up to you to cover the cost of a leaking roof, a furnace that just quit, or a rodent issue that the previous owners forgot to mention. You'll need to have an emergency fund for these kinds of repairs, as well as enough income to pay your bills, utilities and property taxes. You'll also want to get an estimate of your closing costs, such as lawyer fees, and land transfer taxes.
If you're feeling defeated, then it's time to get creative. More and more young people are buying homes with co-borrowers, like family or friends, to help shoulder the cost of buying a home. You can also look into renting a section of your home or a room on Airbnb. While it's not always glamorous, these strategies can make a difference between renting and becoming a homeowner.
Step 4: Focus on your financial health and credit score
It’s time to get serious about your financial health, and that includes your credit score. Regardless of your down payment amount, lenders still need to see that you're responsible with credit and will pay back your mortgage loan.
When it comes to your financial well-being, checking your credit score and credit report is a great way to start—even if you're a year or more away from shopping for a home. When you check your credit score often and well before buying a home, you'll have time to make improvements to your score if necessary. Lenders like to see your credit score above 660. Doing things like watching your credit utilization ratio (how much credit you use out of the total amount available to you) and making your payments on time could help you improve your score.
Step 5: Look into the financial programs available to you
You already know about the Home Buyers' Plan, but it may surprise you that there are a number of different financial programs available in Canada to make the home-buying process a little bit easier. As you prepare to go from being a renter to a homeowner, check to see if you qualify for any programs.
The CMHC First-time Home Buyer Incentive Program is an incentive where the Canada Mortgage and Housing Corporation (CMHC) will help contribute a part of the down payment for your home. While it's interest-free, they share the home's equity with you if you eventually sell, meaning you'll still have to repay some of your home's value.
Land Transfer Tax Rebates are another incentive to note as a first-time home buyer. When you purchase a home, you'll also have to pay a land transfer tax when you take possession of the property. Some provinces, like Ontario, will offer a first-time home buyers’ rebate, up to a maximum of $4,000. Check your province, territory, and city to see what kind of rebates are available.
Step 6: Apply for a mortgage when you're ready with Pine
If homeownership still feels far away, that's actually a good thing. Now that you know how to go from a renter to a buyer, you can take the necessary steps to plan for homeownership.
Whenever you're ready to apply for a mortgage, Pine can help you along the way and answer any and all of your questions.