What is the best way to save money for a house? This is an interesting question and the old advice might require a new perspective given the reality of the current housing market. Home prices have changed dramatically over the last few years and this is impacting how people are making decisions around home ownership.
Over the last few years we’ve seen the average home price increase faster than our ability to save for a down payment. This can make it difficult to save money for a house and this can push home ownership to later stages in life.
This trend in home ownership has been happening for decades, with home ownership shifting later and later. This may be due to a number of factors but there is a definite trend towards purchasing a home later in life.
In 1981 approximately 55.5% of those who were over age 30 lived in their own home.
In 2016 approximately 50.2% of those who were over age 30 lived in their own home.
With the continued increase in home prices since 2016 it’s reasonable to assume that home ownership will continue to shift into the 30+ age group.
So if purchasing a home is happening later in life, does that change the way we save money for a house? Does that change the way we build up our down payment?
Conventional financial advice would suggest that any savings required in the next 1-5 years should be kept in something safe, like a GIC or a high-interest savings account. Historically this meant that savings for a down payment would go into one of these safe investment vehicles.
But what if someone is starting their career in their early 20’s and isn’t planning to purchase a home until their early 30’s, late-30’s or maybe even their 40’s? Should they still be saving for a down payment in a safe investment like a GIC?
Maybe, or maybe not. In this post we’ll explore a different way to save money for a house. A way that is perhaps more reflective of purchasing a home later in life.
Paying off the mortgage early can be a fantastic financial goal. In the last post, we looked at the different ways to pay off a mortgage early, how to make a mortgage payoff plan, and talked a little bit about the benefit of paying off the mortgage early.
In this post, we’re going to look at some considerations when deciding to pay off the mortgage early vs investing. This is a common dilemma for many people in Canada. Where should they put extra cash? Against the mortgage? Or in non-registered investments?
Generally, it’s better to invest inside an TFSA or RRSP before choosing to pay off the mortgage early. There is no annual tax impact when investing inside either of these two accounts. Investments can grow tax free. This can make it more attractive to invest inside an tax advantaged account before paying off the mortgage early. But not always…
RRSPs can be counterproductive at certain income levels and in certain situations. Investing inside an RRSP for someone expecting a very low income in retirement might not be the best use of those extra funds. They may experience large GIS claw backs on RRSP withdrawals in retirement. In those cases, it may make sense to pay off the mortgage early before maximizing RRSP contribution room.
As always, when making a financial decision, like paying off the mortgage early vs investing, it’s important to look at the whole financial picture and not just one aspect. If you’re struggling with this decision then it might be helpful to get a custom financial plan from an advice-only planner.
Deciding to pay off the mortgage or invest isn’t just about taxes and investment returns… there are also a bunch of soft benefits to consider. These aren’t pure financial benefits but they can still be “worth” a lot depending on how much you value them. Make sure you consider the financial benefit of paying off the mortgage early but also the soft benefits as well.
To decide between paying off the mortgage or investing we absolutely need to look at the after-tax rates of return. We’re going to assume that we’ve maximized our RRSP and TFSA contribution room already and are deciding between paying off the mortgage or investing in a non-registered investment account.
One of the largest purchases we’ll ever make in our lifetime is when we buy a home. It’s an exciting time but also very stressful financially. Along with this massive purchase comes an equally massive mortgage. This debt typically takes between 25 and 30 years to pay off but many people choose to pay off their mortgage early.
Paying off the mortgage early is an important financial goal. It’s a goal that is typically (and hopefully) achievable before reaching retirement age.
Paying off the mortgage early is a great medium-term goal, something achievable within 10-20 years (or even earlier if you’re really aggressive). Because it’s a medium-term goal this makes it very interesting as a financial goal. It can be very motivating to see progress against your mortgage each year.
Getting rid of the mortgage is a great feeling! It’s incredibly freeing to see those mortgage payments disappear. It’s also nice to know that you have the security of owning your home outright.
Paying off the mortgage early also removes a huge burden from a family’s monthly cash flow. This creates a lot of flexibility to make lifestyle changes, switch careers, take more time off from work, or even retire early.
There are different ways to pay off a mortgage early. Which method you choose will depend on your personal and financial goals. The important thing is to make a plan.
Making a mortgage payoff plan can be exciting. It’s amazing to see how those future payments can quickly reduce your mortgage. Making a plan is easy and we’ll show you a couple of examples using our free debt payoff tool.
It’s September and, along with the cool weather, that means the real estate market is back in full swing. Often buyers and sellers take a break during the summer, these months are filled with outdoor activities, BBQs and vacations, so this leaves little time to go house hunting.
But now that everyone is back into their regular routine the number of people actively looking for a new home starts to go back up.
When buying your first home there are a few important financial factors to consider. Not only will this be one of the biggest purchases of your life, but your home also drives a lot of on-going costs as well. These on-going costs can impact your budget for years to come.
Buying the wrong house might mean extra costs you didn’t anticipate or don’t have room for in your budget. This can mean years of financial pain and tight budgets.
Buying the right house means you’ll have lots of room in your budget to do all the things you love to do, travel, hobbies, restaurants etc.
When buying a house there are three very important financial factors to consider.
Interest rates are going up and that’s putting a squeeze on anyone with debt. Whether it’s a mortgage, student loans, or a line of credit, you’re about to feel the sting of higher rates. We’ve had unprecedentedly low rates for almost 10 years now and forecasters have repeatedly called for higher rates, and it seems that they’re finally right.
The Bank of Canada just increased their rate again making this the 4th increase in the last 12 months. That increase means we’re being charged an extra 1% interest on variable rate debt versus last year. It also means any we’ll be charged an extra 1% on any new fixed rate debt. On a $350,000 mortgage that’s an extra $3,500 per year in interest charges or about $300 per month!
Rising interest rates impact all kinds of financial products. Variable rate mortgages, new fixed rate mortgages, lines of credit, home equity lines of credit and of course, student loans too.
Not only are we paying more for our current debt but rising interest rates also make it more difficult to qualify for a new debt too. Higher rates will decrease the amount of money you’re qualified to borrow. A household earning 80,000 per year will see their home buying budget decrease by $28,000.
There are a few strategies you can use to immunize yourself from the impact of higher rates, at least for a short period of time. From a few months, to a few years, to a decade, these strategies can help you avoid the sting of rising rates.
Mortgage insurance is one of those things that most first-time home buyers run into when buying a home. Unless you’re lucky enough to save up a 20% down payment you probably need to get mortgage insurance on your home.
So, what is mortgage insurance exactly? And why do you need it?
Mortgage insurance is a requirement for all homes with under 20% down payment (Some banks even require it for down payments of 20%+. But in those cases it’s the bank making that decision, it’s not actually mandatory).
Mortgage insurance helps protect the lender in case you default on your mortgage. It’s a way to provide stability to the housing market. The largest provider of mortgage insurance is the CMHC, a federally backed agency. This means that the federal government is essentially backing the Canadian housing market, and this adds a lot of stability for buyers, sellers and lenders.