Real Estate and Mortgage

Should I Pay Off Debt Or Save For A House?

 

debt repayment

Living On Baked Beans And Hotdogs For A Mortgage

Besides learning how to budget I often get asked, whether to pay off debt first or save for a house

Right off the start, I’m going to say I’m not your financial advisor so do what you want. 

What would happen if I save money for a house, buy a house but have all my debts to pay off still?

Imagine walking into a convenience store and picking up a chocolate bar and eating it only to find out you didn’t bring money to pay for it. 

Now imagine if you saved for a house but didn’t pay the debts you brought when you bought the house plus anything new?

Creditors would start calling and just like eating the chocolate without having enough money to pay. 

There are consequences for our actions when it comes to buying something with cash or putting it on credit. 

If you can’t afford it you just don’t buy it.  Use the Need vs. Want formulation. 

Just imagine whether you’d like to have emergency savings in the bank or relying on the government for money.

There’s no shame as situations differ however I can’t stress loud enough the importance of savings. 

No more excuses, stop blaming what you don’t know the truth about and turn your debt focus back to you. 

You made debt then you pay the debt especially if the amount owing is in your name. 

Credit card companies and banks want their money, not your life story.

When it comes time to pay back any government grants or money you were given you have to pay that back too. 

Understanding How To Pay Off Debt 

While driving by the cash money store it was disturbing to see it so busy which could mean advanced cash. 

It’s no surprise that there are people who simply don’t understand how to pay off debt works. 

The ritzy credit card or bank loan is like swimming in a pool of money without a worry in the world. 

If I may suggest three things to start with.

  • Educate yourself (talk to your banker or financial advisor) or read the regulations on your credit card. You know, the fine print and make notes. 
  • Create a monthly budget
  • Don’t apply for credit cards you don’t need because they are not emergency savings funds.

Stop Throwing Out The Fine Print 

Whenever we open a bill or check the mail regarding anything financial there is always fine print or extras in the envelope. 

Always read the fine print that even though it is so tedious because it’s so small.

I’ve just crumbled it and tossed it in the recycle bin because I say that I don’t have time to read this crap. 

Well, that crap might just bit you in the a$$.

minimum payment credit card

Last week I received an email from a CBB fan who wanted to share something with me that she had found. 

I had already been aware of it but the mere fact that she read her credit card bill and something shocked her was good. 

I thought I would send you this because I find it scary and humorous.

We just renewed our mortgage yesterday and increased our premium to pay off this credit card.

Now instead of 116 years it will only take 15 years and lower interest.

It is pretty sickening to see that you may not even be alive by the time you pay off your credit card debt if you pay the minimum payment. 

Thankfully if you die the debt won’t get inherited by anyone unless they co-signed on the card. 

No Debt and No Mortgage 

Since we paid our $285,000 mortgage off in 5 years which was the biggest relief of our life.

We were only in our 30’s when we finally burnt our mortgage and debt was non-existent any longer.

If you do buy a house whatever you do start an emergency fund and expect that the worst could happen. 

Rushing To Buy A House

I still can’t understand the mad rush to buy a house if you’re not ready but you think you are. 

The process to buy a house is busy and if it’s leaving you on a hotdog and beans diet, think about it. 

To me, that’s comparable to having a rock on one shoulder causing pain and then dumping Bedrock on the other. 

Even if you are moving to a new city for a career change there’s no harm in renting until you find your home. 

Renting is better than paying a fortune for a house in a seller’s market especially overpaying for it. 

The idea of renting when someone was a homeowner might sound horrible but when you see an amortization schedule for a mortgage you’ll cry more. 

Just rent, save money, pay off debt and take the time you need to search, look at houses and not feel rushed. 

It took us months to find our house and we continued to pay $500 rent for a basement room in a house. 

Pay Off Debt or Save Money To Buy A Home

Instantly I knew how I would handle the situation remembering how everyone has their financial priorities.

Call me crazy but I think it’s pretty obvious and perhaps I’ll get some backlash from realtors about it. 

After all, it is a realtor’s job to sell houses and the client’s job to find someone to give them a mortgage.

Once that’s done the realtor gets to work and wants to find you a house to buy as it’s income for him or her. 

Once you find out your debt to ratio number, review your credit score and report this may help you decide.

However, many things could go wrong as a new homeowner. 

Incorporating homeowner financial stress with other debt obligations is a recipe for a disaster. 

Right now in Canada homeowners and businesses are struggling to pay the rent. 

The sad stories of how these Canadians may end up losing their home or business because they can’t pay is saddening. 

There’s only so much money the Canadian government is going to put on a platter to keep everyone afloat. 

You can feel their pain and stress just watching a media story or reading a newspaper article.

I don’t know about you but I’ve seen a massive advertisement and media campaign from just about every business. 

They are pulling out all the guns to get your business while you’re trying to keep a roof over your head. 

Home Improvements 

Both Mrs. CBB and I had a conversation last night about renovating our house before we sell it. 

Either way, we both knew that we have to renovate just to get top dollar for this house. 

That means a new kitchen, new flooring and 2 new bathroom renovations and a new deck. 

Ideally, if we decided that we wanted out of here we’d do a good job renovating but at the lowest costs. 

We wouldn’t care if the basement is finished or not because there are buyers who don’t want it done. 

That was us when we bought this house because we wanted the opportunity to see what was behind the walls and build it our way. 

All of this is going to cost money and time however if your goal is to pay off debt it could take a while. 

I’m the guy who will repair something only if I know I can do it and I’ll do it right.

When I don’t I call in a tradesman to do the job for us and we pay him or her for their expertise. 

Renovations can get pricey especially with the trades like construction, plumbers, planners and electricians, etc. 

I thought to myself anything could happen as a homeowner that requires emergency money. 

Buyers Or Sellers Market 

white house

Then we were on the topic of how houses in the Greater Toronto Area all the way to Kitchener are a fighting battle.

Houses are priced low where buyers feel that it’s a reasonable amount to work with until multiple offers come in. 

The next thing you know you’re paying $100,000 over asking just to buy the house even if it needs extensive repair. 

Sound familiar? Yes, because that’s exactly how homes in Toronto are sold and you get a tiny slice of the pie.

Incentive Programs For First Time Home Buyers

In Canada, there are home buyers incentives for First Time Home Buyers. 

  • Land Transfer Tax Rebates – some or all may be rebated 
  • First Time Home Buyer Incentives- Government of Canada
  • Home Buyers Plan In Canada (HBP) allows you to remove up to $35,ooo from your retirement savings as of 2019 to use a downpayment. However, keep in mind you still need to pay it back. W

Will your monthly budget be able to handle that?

Also consider your income may increase or you may get a big bonus from work but they are both, IF’s. 

The HBP is a program that allows an individual to withdraw funds from their Registered Retirement Savings Plan (RRSP), with no immediate tax consequences, to buy or build a qualifying home for themselves or for a related person with a disability.

The individual (or the related person with a disability) must have a written agreement to buy or build the qualifying home before the time of the withdrawal.

Amounts withdrawn under the HBP must be repaid on a non-deductible basis to an RRSP over a period not exceeding 15 years, beginning the second calendar year following the calendar year in which the withdrawal was made.

Any amount that is not repaid in a year will be included in the individual’s income for that year.

A special rule denies an RRSP deduction for contributions that are withdrawn under the HBP within 90 days of being contributed. – Source

Pay Off Debt Fast 

How do you pay off debt?

Stop creating debt and get rid of what you already have. It’s as simple as that. 

The snowball method of paying off debt is one the most popular ways to strike-off debt.

Pay off the smallest debts first and pay the minimum balance on the larger debts.

You’ll have to write out all of your debts and interest rates to know how to stack them. 

Once you pay a small debt off, put that money towards the next debt and so on. 

It’s not extra cash in your pocket when you pay one credit card when you’ve maxed out 4. 

Pay Off Debt And See The World Differently

You need to pay it off and go on a cash budget so you know when the money is gone it’s gone. 

Having free reign in the cookie jar will continue the debt cycle because saying NO is the hardest thing to tell yourself. 

When the debt is gone your outlook on life will be different because you’ll start to save more and have opportunities. 

This is what happened to us and how we managed to put an $85,000 down payment on our home

There was still a mortgage to pay but it was our only debt along with utilities. 

We smashed our mortgage debt by sourcing cash because I was earning a tad more than minimum wage.

That might have been overtime, social experiments, food testing and group marketing forums.

As well, we signed up for as many rewards cards as we could only for the stores we frequent. 

There was just so much opportunity when the debt was gone. 

I made sure to ask my employer for a raise every year and I always got it because of extra efforts. 

Having the opportunity I was given to move to Canada I was fortunate and blessed. 

 Final Thoughts On Debt Repayment or Saving For A House

  • Document debt if any so you know who you are paying, how much the debt is and the type of debt. 
  • Stop spending money and registering for credit you don’t need
  • Create a Budget and find out how much money you have left after you pay your bills. 
  • Consider using a mock home buying budget including homeowners expenses. Include your potential mortgage in the spot of your rent including property taxes. You can also use a Home Buyers Calculator
  • Talk to a broker or mortgage specialist about how much they would give you for a mortgage and the rates.
  • Consider if you want to tap into first time home buyers plan and let the broker or specialist know
  • Don’t forget to consider closing costs on the home you will purchase such as paying your realtor.
  • Having to pay for CMHC mortgage insurance if you don’t have a 20% down payment for the mortgage. 

Closing costs, ranging from 1.5 to 4% of the purchase price, are the legal and administrative costs you will need to pay when your house closes. – Rate Hub Canada

Formula For Paying Debt and Saving For A Down Payment For A House

Rent+Pay Off Debts+6 to 12-month Emergency Savings +Earn Extra Money= Saving Money For a Down payment.

You may also want to consider adding, term life insurance or mortgage insuranceretirement investing as a budget category when you create a budget.

We were able to do all of the above but we stopped our retirement savings after Mrs. CBB lost her job. 

There were lots we had to cut out of our budget so we could start investing again which we did. 

The bad news had us a bit freaked out as we lost and income and had to reset our expenses.

This was when the Canadian Budget Binder budget started but it didn’t look like it does today. 

Critical equations: Save for emergencies, create a debt repayment plan, buy a house with 20% down and create a contingency plan B

Always remember your bank or broker won’t do the budget math for you. You need to know your numbers and say yes or no to the amount they plan to lend you. 

Once you have everything sorted and safe for you at all angles and start looking for your home. 

Don’t leave yourself eating Kraft Dinner every night if you buy a cheaper home and live comfortably instead of with financial stress.

Just because someone says you can afford doesn’t mean you can. Remember that.

Discussion: What would you do, pay off debt or save for a house?

Leave your comments below. 

Mr.CBB

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