The pandemic has flipped the real estate market in Canada. The average cost of a single-family home in Canada was upwards of $715,000 Canadian Dollars in October 2021. This is a Year-on-Year increase of over 18%. This average price is driven by large metropolitan centers such as Toronto and Vancouver but still is upwards of $500K if these CMAs are excluded from the national average. Running a few key stats on the Inflation Calculator on the Bank of Canada website reveals that a basket of goods of services that costed $100 in 2019 would cost $105 in 2021. If the price of homes is going up and things around you are getting expensive, how do you buy your first home ? How do we go about saving money for a home.
Let’s talk about Interest rates on Savings accounts. A regular Savings account like most of us have would have a Savings rate of less than 0.10%. The rate of Savings for a High Interest account can be around or upwards of 0.50% but finding those deals would be extremely difficult. Even if you did find such a deal, you would make 50 cents on $100 on that account a year. Over the course of two years (2019 to 2021), your $100 in the account would grow to just over $101. It is hard to keep up with inflation, let along buy a new house. So, what can we do?
The first step would of-course be to understand how much House you can afford and when you want to buy. Check out our upcoming blog on how much house can you afford. Once you know how much you need for a deposit, you can plan on the Saving/Investing portion.
If you have a few years in your hand before buying your first property, you could explore investing the money. The average Rate of return from the S&P 500 has been about 10% from 1926 to 1918. But investing should be done cautiously and over a longer horizon. If your goal is to buy the property in a relatively shorter amount of time, you could consider shorter, more secure but lower interest options such as bonds or GIC.
You could also save money in your RRSP accounts and withdraw up-to $35,000 tax-free from your account towards the purchase of your first home. The caveat is that you need to pay the money back to the account within 15 years of making the withdrawal.
Where can we save some money?
This is going to vary from person to person. Some of us may already have maxed out on our frugality limit and would have to consider earning extra income through other means to start building this deposit fund. We will write another short piece on how to potentially supplement your primary source of income. For others to looking to cut-back on expenses, consider the following:
- Lower the cost of your housing: Housing will be the single largest expense for most of us. If you live alone and have extra space in your apartment, consider putting the den on rent as an example. This is, of-course, subject to agreement by your landlord. If you rent a studio apartment and don’t want to move from the neighborhood, see if you can move to a house with roommates or another apartment with a roommate. If you don’t want to live with anyone else, consider changing postal codes to find a more affordable apartment. Remember, you don’t build equity with rent.
- Auto-loans: Evaluate if you really need a car first. If you are well connected using public transportation and still pay a hefty monthly payment on your car, consider selling your car. This is serious money in the pocket each month.
If you live in an area where distances to say picking up grocery or going to work are long and you may have a hefty monthly payment on your car, consider paying off your entire car payment if you have money saved up only if it saves you interest. If you don’t have money saved, consider selling your existing car and buying something cheaper outright. The goal here is freeing up your monthly cash flow.
- Auto-insurance: Auto insurance rates in Canada are among the highest in the world. If you’ve been with an existing provider for a long time, consider contacting them to check if they can offer you a better price. You could consider gathering quotes prior from other vendors prior to this call for a better negotiation. If your existing provider is unable to help, consider moving to a different more affordable provider.
The above would potentially be the largest expenses that you could cut-back on monthly. But there is opportunity to further trim down on your expenses further. Some good practices that you could follow to save and invest even more each month would include:
- Takeouts and Deliveries: Assess how many times a month you have food deliveries and takeouts done. A quick look at your credit card might give you a snapshot. A reduction in the frequency of takeout and an increase in the frequency of trying to cook your own meals will help with netting more from your monthly income.
- Research before buying anything: Even groceries. Certain stores may carry a higher quality generic brand compared to others. The same product maybe sold for a higher mark-up at a different store. You might want to split your single grocery trip into two trips to two stores if you note a substantial difference in the pricing in select items. Caveat here is that you are not spending a lot on gas or public transportation trying to make this happen.
- Phone and Internet Bills: Similar to the auto-insurance exercise, consider gathering quotes from competitors before reaching out to your service provider. A polite ask may help save a few dollars a month here as well. The largest teleco companies in Canada usually have a premium division and more affordable brand. If you use the premium brands, consider moving to the more affordable brands to save serious dollars each month.