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BDO Red Deer

4909 49th Street
Red Deer, Alberta
T4N 1V1
Phone: (403) 342-4103

How to Destroy Personal Debt So You can Buy a House

You’re out of school, settled in your career and you want to buy your first home. There’s just the “small” matter of what feels like a ton of personal debt. How do you save for a down payment when you’re paying off debt? And are you ever going to be able to afford your own home?

If you’re feeling weighed down by student debt, ongoing credit card balances and bank loans, you’re not the only one. A January poll from Angus Reid and The Globe and Mail found that only 20 per cent of 26-37 year old Canadians are debt free. Forty-two per cent of 26-37 year olds do own a home, but the poll doesn’t reflect whether or not they could afford their home.

In recent years, many millennial homeowners have found themselves house poor and wishing they’d never taken on a mortgage. They’re paying much more for shelter than they can afford  and they’re concerned about rising interest rates.

If you’re tired of renting and feel like you’re ready to buy, take a step back and look at your total debt load. Owning a home is more expensive than renting. Paying off your debt is only going to be more difficult when you’re making mortgage payments and covering monthly housing expenses.

Your first step towards home ownership is to deal with your personal debt. Try one or all three of these debt-destroying strategies:

  1. Start living on a homeowner’s budget

So we’ve established that owning will cost more than renting, but how much more? Once you factor in taxes, utilities, insurance and everyday maintenance costs, aim to budget for a monthly mortgage payment plus 40 per cent.

For example, if you expect your mortgage payment to be $1,500, add an additional $600 ($1,500 x 40 per cent) for additional housing costs. Total monthly housing costs equal $2,100.

Now, determine the difference between those projected monthly housing costs and what you’re currently paying to rent. Put that money aside each month to pay off debt.

This strategy has two benefits: you’ll reduce your debt, and you’ll find out whether you can comfortably afford to become a homeowner without worrying about running short of cash.

  1. Learn about your debt relief options

Maybe you need help creating a workable budget, or perhaps its time to look at formal debt relief, such as a consumer proposal or a consolidation loan. Understanding your options puts you in control of your debt. Talk to a Licensed Insolvency Trustee to get the information you need to make the best decision for your situation.

  1. Seek out inspiration

Being in debt is challenging. In our Affordability Index poll, we found that 34 per cent of millennials are overwhelmed by their personal debt and don’t know what to do about it. Look for online resources that share the stories of people like you who’ve managed to get out of debt.

Here’s some inspiration from Krystal Yee, who paid off her student loan and credit card debt in just one year by living frugally and making as much money as she could through three jobs.

Can I own a home and pay off my debt at the same time?

There are alternative ways of becoming a homeowner that are less expensive, ensuring you will still have money for debt repayment. For example, you can co-own with your siblings or friends, or buy a property with a basement suite that you can rent to generate income.

Buying a house with several other people has definite advantages. You’ll be able to live in a larger place than you could afford on your own, while you continue to work towards important goals, like paying down your debt and saving for retirement.

Personal debt makes it more challenging to become a homeowner. By focusing your energy on eliminating that debt, you’ll learn the skills that will help you to save for a down payment and find a home that is affordable for you.

Is personal debt preventing you from buying a home? Share your story with us! #LeaveDebtBehind #HousePoor #StudentDebt.

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