Buying a home in Canada in the last couple of years has seemed pretty hard since prices have risen quite a bit. That being said, with a lot of discipline and a good down payment, becoming a homeowner is possible! Once you know how to save for a down payment, you can make homeownership a reality! Take a look at the information below on how you can best save for your down payment, as it isn’t as easy as just putting some money aside!
What is a minimum down payment?
When purchasing a home, a down payment is always required. The amount you put down is applied directly to the purchase of your home. Once you’ve purchased a home and you are ready to close on it, your lender will deduct your down payment from the purchase price and provide you with the rest of the funds in the form of a mortgage!
The amount you need for a down payment depends on the home, but it ranges from 5% – 20% of the purchase price.
Let’s say you’re looking to buy a home that has a purchase price of $500,000. You would need a 5% down payment of $25,000. On the other hand, if you’re looking at a property that costs $600,000, you would need to have saved at least $35,000.
Many people try to come up with a down payment of at least 20% to avoid the need for mortgage loan insurance, while others will buy as soon as they have the minimum down payment required just to get into the market. What you settle on is a personal choice, but it also depends on housing prices in your area and the amount of money you qualify to borrow from a mortgage lender.
Ways to Save a Down Payment
1. Cut your expenses
Every dollar you save can be diverted to your home down payment. Take a look at your budget and see if there are any expenses you can reduce, such as entertainment, dining out, travel, etc.
2. Put your money in a high-interest savings account
Since you’ll be setting your money aside in a bank account, you might as well make some interest! Unfortunately, most traditional financial institutions now pay nearly zero interest, so you’re better off moving your money to a digital bank where they offer a more competitive interest rate.
3. Use the home buyers plan
The Home Buyers Plan is a program that allows you to borrow up to $35,000 from your Registered Retired Savings Plan (RRSP) tax-free. If you’re buying a home as a couple, you can each with-draw from your RRSP, giving you access to up to $70,000 for your down payment. You need to repay the funds to your RRSPs within 15 years.
4. With-draw from your tax free savings account
A Tax Free Savings Account lets you grow your savings without paying income tax and withdraw whenever you wish — making it a great place to set aside your savings.
5. Use the first time home buyer incentive
Another government program that can help you increase your down payment is the First-Time Home Buyer Incentive (FTHBI). If you have at least 5% of the purchase price saved as a down payment, the government will give you an additional 5%-10%. These additional funds will increase your down payment, which would then lower your monthly mortgage payments.
6. Be mindful of what you do with your money
For many people, the idea of saving a down payment for multiple years is challenging. They may start to wonder if it’s a good idea to invest their down payment so they can reach their goal more quickly. While it’s certainly possible to see some gains if you were to invest, you also have an equal chance of losing money.