Q: How can I effectively save for a house if I’m already in debt?
A: Traditional wisdom says to pay off any debt before saving for a big purchase like a home, but if you want to do both, you’ll need to take a good, hard look at your monthly cash flow and get real about how much you can afford to put toward a down payment.
“In a perfect world, people are paying down their debt and then building savings for bigger goals like a home purchase,” says Liz Schieck, a certified financial planner at the New School of Finance.
However, she acknowledges that reality is more complicated for many people. To work toward bigger goals like home ownership, your cash flow needs to be working smoothly, she says.
Schieck suggests playing around with how much you’re putting toward your debt and finding a groove where you’re paying it down consistently before starting to save for a down payment.
“It can take a bit of trial and error to figure out how much you can save,” Schieck says. “Really aggressive and restrictive budgets rarely work,” she adds, so the key is to find an amount that you can realistically and sustainably save while paying off your debt and still living your life.
Paying off debt and increasing your credit score to the highest level possible will help convince mortgage lenders that you’ll be a good client, says Bruce Sellery, CEO of Credit Canada. “That means they will extend the best rates to you and allow you to qualify for a bigger mortgage,” he adds.
ABC Skills Hub offers a free online course that can help you learn ways to improve your credit and figure out how much you would be able to borrow to buy a home and how much you’d need to save.
For anyone hoping to buy a home within the next 15 years, Schieck says, it’s a smart idea to start saving through a First Home Savings Account (FHSA). You can open an FHSA through any financial institution that offers registered plans, such as banks and credit unions, and can contribute up to $8,000 a year. Contributions are typically tax deductible, reducing the amount of income tax you owe.
Even if you can’t make the maximum contributions, you can still get tax deductions and grow your savings over time. Plus, you can carry forward unused annual contribution room to future years to catch up and if you don’t use the FHSA to buy a qualifying home, you can transfer the funds directly to your RRSP tax-free.
If you have debt sticking around from the past and you’re comfortably making regular payments on time and not taking on new debt, “then you can totally save for other goals at the same time,” Schieck says.
Money Coach is a weekly feature that helps Canadians find helpful solutions to personal finance challenges. If you have a question, email Lora at [email protected].
