How to save for a house when you’re renting

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by Farhaneh Haque

As a renter, with each rent cheque, you may become increasingly anxious for homeownership and the day when these regular payments go towards your own mortgage instead of your landlord’s pocket. When you’re ready, homeownership can make a lot of sense, allowing you to start building equity each month.  

So, where do you start?

If you’re serious about home ownership, make a plan and commit to a budget. Calculate your cash flow and decide how much you can save each month. No different than what we were taught when we were young; create compartments (or jars) for each category- shelter, personal needs, dining, transportation, health, savings, entertainment, gifts, etc. Creating this budget may reveal some areas where you can – and should – cut back in order to reach your savings goals sooner.

Here are my tips for renters on how to set a budget and save for a down payment:  

Don’t go overboard on rent

Aim to spend only a portion of your gross monthly income on rent to leave a cushion to put away each month. As a homeowner, it is recommended that no more than 39% of your gross income should go toward shelter costs; this includes mortgage principal + interest payment, property tax and heat/hydro/water. As a renter you only pay one payment which is likely less than 39% of your gross income, so I recommend carving out the full 39%, from which you pay your rent and direct any difference toward savings. This practice will not only accelerate your down payment but will also condition you to budget as a home owner.  

Save for a larger down payment

Typically down payments range from 5-20% of the purchase price, but having a bigger down payment up front could make a significant difference to the amount of interest you’ll pay over time, and will make home ownership more affordable and more comfortable. Consider setting up an automatic savings plan; Paying yourself first is a lot easier to do — and easier to stick with — when you make it automatic Also, when you put down 20% or more, you can avoid paying for high ratio default insurance which for a purchase can range from 0.5% to 4.75% of your mortgage principal. Additionally under the new guidelines issued by the [Department of Finance](covered in my last blog titled, “what the new mortgage rules say, and what they mean for homebuyers”), with less than 20% down you are limited to a maximum 25 year amortization period. Which means, saving a bigger down payment can: save you interest over time, help you avoid high ratio default insurance, and offer you more flexibility in how you manage your mortgage.

Make sure your debt is manageable

Your mortgage will most likely be the biggest debt you ever take on. If you’re already carrying other debts like car payments or student loans, do not take on a mortgage that makes your debt load unmanageable. Set a budget and use debt management tools to get your debt under control with the goal to purchase your own home sometime in the future. Paying off your debts will free up the money you need to build your savings and your down payment. Finally, here is some food for thought as you evaluate renting vs. buying.

Consider:

Mortgage
$344,250
Interest Rate
3.29%
Term
5 years
Amortization
25 years
Monthly Payment
$1,680.80
Monthly Rent
$1,400.00

Rent vs. Own:

Cumulative Mortgage
Payments
Cumulative Rent
Payments
Year 1
$20,169.60
$16,800
Year 2
$40,339.20
$33,600
Year 3
$60,508.80
$50,400
Year 4
$80,678.40
$67,200
Year 5
$100,848.00
$84,000
Difference
Paid
($16,848.00)
Equity
accumulated
as a result of
mortgage pay
down
Mortgage balance at end of year five: $295,868.91
Equity accumulated:
$48,381.09
$0

Illustration purpose only. Assumes mortgage term started on January 1 and property value at end of term is same as start of term.

As this chart shows, if you purchase a property for $375,000 with 10% down ($37,500), at a mortgage interest rate of 3.29%, your mortgage balance will be $ 295,868.91 at the end of 5 years. Effectively in 5 years, you will have built an additional $48,381.09 in equity as a result of paying your monthly mortgage payments. Whereas if you were renting at $1400 / month, you will have paid $84,000 in 5 years, but will have no equity to show for it! Buying a home may not be right for everyone but if you are thinking about it, work with professionals who can help you get prepared.

We would like to hear from you, share your home buying stories with us at TD Helps with Home Ownership 

About the Author

Farhaneh Haque is the Director of Mortgage Advice with TD Canada Trust, a leader in residential real estate mortgages and home equity lines of credit. With over 18 years of lending experience, she is entrusted with the responsibility of offering mortgage advice to help Canadians make informed decisions about home financing and ownership. 

Farhaneh and her team draw upon research commissioned by TD Canada Trust, which reveals consumer attitudes and behavior related to home ownership such as choosing and buying a first home, renovating and greening a home, as well as understanding gender, regional and other demographic preferences. They also have access to proprietary research from TD Economics on topics such as Canadian interest rate forecasts and Canadian housing market insights 

In her personal time, Farhaneh is an active member of community groups promoting youth education; in particular helping high school students in securing funding to pursue post secondary education.

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