We used your questions and comments as inspiration to talk about 2 things that especially concern young adults when it comes to housing.
1. I'd like to buy a home within 5 years, should I make sure to pay off my student loan first?
No. In fact, accelerated repayment is rarely advantageous because student loans are generally amortized over 10 years, the rate is low, and interest is tax deductible.
The debt you should prioritize is consumer debt
The debt you should prioritize is consumer debt (credit cards, lines of credit, personal loans, etc.). You can reconcile your big plans with debt repayment: - This link will open in a new window.Follow the guide.
2. I'd like to start saving up for a down payment, where do I start?
The earlier you start, the faster you get used to it (and the better it pays off). It just takes a little planning and a lot of discipline to put away a few thousand dollars.
You need to put down at least 20% of the selling price to qualify for a mortgage. If you don't have 20%, you can take out mortgage insurance and you'll only need to put down 5%. In both cases you need to prove you have 1.5% of the selling price to cover start-up costs.
3 solutions for saving for a down payment
1. TFSA: save money through regular deposits
An amount is withdrawn from your personal chequing account and transferred to your tax-free savings account however often you wish. There are many investment options are available.
Sometimes, you'll need to change your habits to save. For example, settling your debts, using credit wisely, limiting your expenses and following a budget are actions that take discipline but will help you adopt good money habits so you can save up in no time!
2. Contribute to an RRSP as early as possible
The idea behind an RRSP is simple: Time's on your side because your savings grow tax free, which maximizes returns. Plus, you could add the tax savings from your contributions to your down payment.
The longer the money remains tax-sheltered, the greater your retirement income. That's why it's important to start contributing as early as possible.
In the same vein, when you contribute earlier in the year, your contribution is more profitable. Remember: Time is your best ally!
3. HBP: with or without RRSP
Under the government program known as the Home Buyers' Plan (HBP), you can use the money from your RRSP as a down payment to purchase your first home. You'll reduce your mortgage payments and mortgage insurance premium (if any).
With the HBP, you'll be able to withdraw up to $35,000 from your RRSP (i.e., $70,000 per couple) to purchase a new or existing property. You do not pay taxes on the withdrawn amount and you have up to 15 years to repay the amount without interest. It's like taking out a loan on your RRSP.
Even if you don't have an RRSP, you can take advantage of the HBP. Here's how:
- Borrow from the caisse an amount that corresponds to your maximum RRSP contribution.
- Deposit the amount in an RRSP for at least 90 days.
- Withdraw the non-taxable amount from your RRSP and pay back your loan; you'll only need to pay the interest accrued during the 90 days.
- Use your tax return as a down payment on a home.
- Repay your RRSP amount within 15 years (1/15 per year).