Asking for a friend — if you’re a 29-year-old writer with minimal savings and a monthly rent in Toronto that is nearly half of your income (plus you’re saddled with a couple grand in student loan debt) do you have any business trying to get into the property market?
I brought this question to Octavia Ramirez, the founder of Paper & Coin — a financial coaching company that helps Millennials reach their personal finance goals. With my monthly expenses, current savings and dream to buy a cottage in Ontario on the table — we made a plan to get me into a comfortable enough position to start making a dent on a downpayment.
My dream of owning a cottage is the inspiration behind The Ladder, Livabl’s brand new newsletter, all about the climb on and up the property ladder. The first newsletter drops on March 6 and I’ll be sharing more from our session then. Sign up here!
If you dream of homeownership but feel it’s out of reach — you don’t have to give up altogether. Octavia shares strategies to start accumulating savings today to make your long-term homeownership goals achievable.
When you’re saving money, be on the offense and the defense
“A defensive approach would be to slash your current budget and trim the fat — cutting out things like take-out coffee and eating out. Of course, we all like to have the freedom to have those things but if you have a long-term savings goal, you will want to limit spending that isn’t totally necessary.”
I like getting gold stars, which Octavia handed me when she took a look at my spending. “You don’t have an issue with spending, Jenny. I look at these spreadsheets all the time and you’re really good at staying within your means.”
But there is always room for improvement. For me, this means deleting Uber from my phone (it’ll be cycling weather soon!), cutting out meat (those boar sausages were good, but not that good) and cancelling one of my gym memberships — I don’t need Goodlife and Planet Fitness (even if it’s only $10 a month). I also won’t be hopping on a plane anytime soon, but will compromise with camping trips throughout the summer.
When you’re on the offense, you understand that your income isn’t fixed. “Once you’ve trimmed the fat on your budget, ask yourself how you can bring more money in,” explains Octavia.
If you want to increase your savings, take a look at the tangible skills you can leverage, on top of your primary income. Just be careful you don’t invest too much into your side hustle to get it off the ground.
And keep in mind, promotions and career leaps happen all the time. If your cash flow is lower than you want it to be, use it as fuel to take leadership on more projects at work, fill in gaps in your organization, summon the courage to ask for a well-deserved raise or wow your customers with extra great service (and simultaneously watch the tips roll in).
Pay off high-interest debts first
Maybe the holidays took a toll on your credit card, or a summer vacation is still hanging out on your monthly statements. If you have consumer debt with interest rates above five percent, it’s wise to pay those off in full before you start socking money away for a downpayment.
“There’s no such thing as good debt,” explains Octavia. “Ideally, I’d love for everyone to be completely free of their consumer debt, which is any type of car payments, credit cards and loans before they even think about getting into homeownership.”
You may be tempted to grow your savings while covering the minimum payment on your credit card. This isn’t a great idea because credit card companies can charge interest of 18 percent or more. Even if you invest the money you saved by not paying your credit card in full, it will never be enough to cover the high interest (walk away from anyone who promises you otherwise). Side note: if you do choose to invest your money and you have short time horizons like buying a house, your investment should be low-risk since you won’t be able to ride out the fluctuations in the market.
Ideally, you want to pay off the big guys first and move on to the lowest debts next — like student loans. “That $170 you’re handing over each month for OSAP will look much better in your RRSP,” Octavia told me.
Your rent should be no more than 25 percent of your income
“When it comes to housing expenses, I use somewhat conservative measures. I’d love for your housing to be no more than 25 percent of your take-home pay. When your rent is at about a quarter of your living expenses, you have the margins to not only save for a downpayment but also do other things in life like travel,” Octavia explains.
The financial advisor is comfortable pushing that amount up to 30 percent. I’m currently at 45 percent. “This is common in Toronto where rent has soared and many Millennials are living in that 40 to 50 percent range.”
Rentals in Toronto are still affordable if you have a roommate or partner and live outside the downtown core. In the past year alone, I’ve had two friends ditch their one-bedroom basement apartments in lieu of a roommate. Not only do they now have enough light to keep a houseplant alive, but they also haven’t complained once about the roomie thing. The extra cash in their pocket sweetens the deal. Moving to a new apartment with lower rent may feel drastic, but if your current rental is more than 25 percent of your income and you really, really want to buy a house, you might want to consider it.
Aim to put at least 15 to 20 percent of your income into a savings account one day
Maybe you don’t have $10 to put into a savings account right now. That’s okay. Bringing down your spending, your rent and looking for opportunities to make more money will — over time — get you on the road to saving for a downpayment. Octavia recommends making it a goal to put at least 15 to 20 percent of your income away into a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA).
I’ve already waxed poetic about the benefits of an RRSP and TFSA for saving and a first-time home purchase and everything you need to know about the RRSP Home Buyers’ Plan but here’s a quick overview.
The RRSP is designed to help Canadians save for retirement, but you can withdraw up to $25,000 tax-free for a first-time home purchase under the Home Buyers’ Plan.
“If you have a partner who also has an RRSP and is a first-time homebuyer, you can both use the Home Buyers’ Plan up to $50,000 tax-free. Teamwork makes the dream work,” says Octavia.
You can contribute a maximum of 18 percent of your income, or $26,230 a year, to your RRSP (whichever one is highest). You’ll reap tax breaks when you contribute — any money will be deducted from your income that year and investments inside your account will grow tax-free. You’ll eventually have to pay taxes when you pull the money out in retirement, but the idea is that by that time, you will likely be in a lower tax bracket.
TFSAs are another great tool to save for your downpayment because any interest earned on investments grows free of tax and comes out of the account tax-free. It’s a lot more flexible than an RRSP because you can take the money out any time, with no penalties. In 2019, the yearly contribution limit grew from $5,500 to $6,000. That said, if you’ve never opened a TFSA and you were 18 when the program started in 2009, you can put in up to $63,500 in a lump sum (they get this figure by adding up the yearly limit from the past ten years).
It’s never a bad thing to have both an RRSP and TFSA. You can even take the tax breaks you get when you contribute to an RRSP and put the money you saved into a TFSA.
Understand exactly how much you’ll have to save
Fiddling around on an online mortgage calculator, I can bring the downpayment percentage all the way down to five percent for a $200,000 cottage. That’s only $10,000! I can raid my RRSP and buy a place today!
Not so fast.
“I’m very conservative when it comes to these things. I really want you to put down 20 percent so you don’t have to have to pay mortgage insurance,” explains Octavia.
When you put down less than 20 percent (meaning you’re borrowing more than 80 percent to cover your house), you’ll get dinged with CMHC insurance and higher interest rates. Not to mention your monthly payments will be higher since you have more to pay back.
“Another benchmark to ensure you will be comfortable with your mortgage is to ensure your housing expenses don’t exceed 30 percent of your take-home pay — this includes everything relating to homeownership from your mortgage to housing tax, insurance and repairs.”
You will also want to build an emergency fund — the equivalent of three to six months of living expenses.
And let’s not forget closing costs. “There are more transactional fees that go into purchasing a property that go over and above just the downpayment — closing costs, having a realtor and home inspector, not to mention lawyer fees and on and on,” explains Octavia.
It’s important to go in with eyes wide open about how much it will cost.
Turning the cottage into an Airbnb, asking my parents for a loan and saving like crazy might get me there. Maybe. Follow along by signing up for The Ladder — the newsletter I’m penning for Livabl where I’m tracking the journey to stepping on the first rung of the property ladder.
