Megann  Willson

Megann Willson

Real Estate Agent

HomeLife/Realty One Ltd., Brokerage

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Save toward a downpayment? Or pay down debt?

The “latté magic” of yesteryear, used to suggest that you could save up a downpayment with tactics like skipping a fancy latté every day. That, of course, is unrealistic if you’re looking at a city like Toronto, where the average home is over a million dollars. Even if you are able to get a high-ratio mortgage (leveraging 95% of your property), which means you’ve found a home for under a million, that’s a down-payment of 50,000. That’s a lot of cold, hard cash.

On an average salary of 75,000, possibly 60,000 is left after deductions, and I’m being generous. That’s 5000 per month. Put away 10% of that, and you’ve saved 6,000 in a year. That’s eight years of savings to get to 50K. That doesn’t include savings for emergencies, vacations, or anything else. Nor does it account for the amount housing prices are likely to rise over that period of time.  If you’re lucky, you’ll get raises, and make a reasonable return on investments wherever you’re stashing your money.

I’m not saying it’s not possible, because it clearly is. I had one client last year who bought his first condo after living very frugally for a couple of years. And I mean very. No car, no parties, no drinking…but he did it, and he got a great place. (He is still living quite frugally, as he’s developed a skill for that – which will serve him well over time). However, the days of buying a modest family home on a single salary are over for most average families in big cities like ours, unless they have help.

But that household debt number has me really concerned. Back when the Boomers (of which I am one, but I missed some stops on the wealth train, coming at the very tail end of that group) started out, credit was rarely used. Paying cash for purchases (or another quaint concept, layaway, whereby you made payments to the merchant until the item was fully paid, and then took it home) was much more common. Nowadays, plastic is a route to everything and anything, even the most miniscule purchases. I’m not immune. I use my card for many purchases. The difference is that in my case, my partner and I both pay off our cards every single month. We never carry a balance. It’s simply too expensive. We weren’t always smart about this, but we learned our lesson and we stick with it now.

Having high household debt will hobble your efforts to save a down payment. It’s an ever-increasing spiral. More debt is more interest. More interest is less money to save. Canadians are living so close to the bone, in many cases, that they are making minimum payments and saving nothing. They’re one emergency away from not being able to buy groceries, much less pay their rent. On top of all that, hefty debt-to-income ratios mean they are a credit risk, even if they do manage to save something.

What do you think that means my advice is, in this case? It’s to tame the debt. No doubt about it. Simultaneously, put money away for emergencies – so that you don’t add to the debt. Chop up the cards, freeze them in a bucket of water, or lock them somewhere inaccessible. Start living on cash. Then knock that debt down as fast as you can afford, and don’t do anything but the essentials until you get it under control. Not only will that improve your chances of becoming a homeowner one day, but it will help you establish frugal habits that will help you build wealth in the long run. No matter how much you want to own a home, get the debt under control and build an emergency fund. Then, and only then, start working on your down payment. I can wait. 

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