Are you hoping to buy a home but you’re not sure how you can afford a down payment? The financial responsibility of purchasing a home can be intimidating. But with a good money saving strategy and some self-discipline, you’ll be ready to purchase your home in no time. We’ve compiled a list of 6 practical ways you can start saving for a down payment today.
But before we address ways you can start saving, it’s helpful to know what exactly is a down payment, and how much money a down payment requires.
How Much Do You Need For a Down Payment?
A minimum down payment is the smallest amount of money you can put upfront for the purchase of a home. Your lender then deducts your down payment from the purchase price of the home. The remaining amount is covered by the mortgage. If your down payment is less than 20% of the price of the home, you’re obliged to purchase mortgage loan insurance. If you have a poor credit history or you’re self-employed, your lender may require a larger down payment.
A minimum down payment, according to the Financial Consumer Agency of Canada, must be 5% of the purchase price if you’re buying a home worth $500,000 or less. So, for example, if you’re purchasing a home at $400,000, the minimum down payment at 5% will be $20,000.
If you’re buying a home that costs between $500,000 and $999,999, the minimum down payment will fall between 5% and 10%. You must pay 5% for the first $500,000 and then 10% for the remaining price. So, for example, if you’re purchasing a home at $600,000, the first 5% is $25,000. The remaining $100,000 is at 10%, which comes to $10,000. Together, those two amounts require a minimum down payment of $35,000.
If the home is worth $1 million or more, the minimum down payment is 20% of the purchase price.
What Is Mortgage Loan Insurance?
As mentioned above, if you’re paying the minimum amount for your down payment, you will be required to purchase mortgage loan insurance. The fee you pay for this service is called a premium and helps protect a lender against mortgage default. The cost ranges from 0.6% to 4.50% of your mortgage. The more money you can put toward your down payment, the less your loan insurance will be. For more information, check out our article 4 Questions to Ask Your Mortgage Lender.
Now that you’re familiar with the requirements of a down payment and mortgage, here is a list of 6 practical ways you can start saving for a down payment.
1. Prioritize Your Spending
Purchasing a home is a major financial investment. Any way you can prioritize your current expenses and cut back on unnecessary spending will significantly help your wallet. Take a moment to evaluate your spending habits. How frequently do you eat out? Do you enjoy taking expensive vacations? How much money do you spend buying the latest gadgets? Start budgeting. One significant way you can save money is getting rid of an extra vehicle. You could easily save up to $9,000 by going down to one vehicle instead of paying gas, insurance, maintenance costs, and monthly car payments for two.
2. Build Your Credit Score
If you have a poor credit score, you’re going to have a difficult time qualifying with a mortgage lender. The more debt you have, the more interest you’ll be paying. You can’t save money for a down payment if you’re paying huge amounts of interest for debt. To build your credit score, or keep it in good standing, make sure you always pay your bills on time. Never go over your credit card limit. Regularly use your credit cards and pay back loans for tuition, vehicles, or other larger purchases. This will ultimately improve your credit score, showing mortgage lenders you are reliable.
3. Put Your Extra Savings Into A Savings Account
One practical way to start saving is to put aside extra money into a savings account. Talk to your financial advisor and set up an automatic contribution. Even a small amount every week, two weeks, or month, will start adding up over time. If you’ve paid off a debt and have some extra money on hand, or you’re still living at home and not paying rent, get into the habit of making monthly payments. Pretend you’re making mortgage payments and set aside $500 every two weeks to go into your savings account. You’ll be amazed at how fast your savings will grow.
4. Withdraw From Your RRSP
If you’re a first time home buyer, you can withdraw from your Registered Retired Savings Plans (RRSP) with the Home Buyers’ Plan (HBP). This means that you can withdraw up to $35,000 for a down payment from your RRSP, tax free. Take note that you must repay this money back into the RRSP within 15 years. If not, the money will be subject to taxation.
5. Use A Tax-Free Savings Account
Another great way to save money is to put it into a Tax-Free Savings Account (TFSA). Your TFSA account may be accessed at any time, for any purpose, without tax implications. If you want to leave your RRSP untouched, TFSA accounts are a fantastic solution for saving and withdrawing for a down payment.
6. Apply For The First-Time Home Buyer Incentive
If you’re a first time home buyer, take advantage of Canada’s First-Time Home Buyer Incentive. You’ll be offered a shared-equity mortgage with the Government of Canada. This means that the government shares investment in your home. The Incentive offers to contribute a certain amount to your down payment. It offers 5-10% on the total purchase of a newly constructed home and 5% on an existing home. However, you must repay that Incentive within 25 years, or when the property is sold.
Taking advantage of the First-Time Home Buyer Incentive will give you a lower mortgage, meaning a lower monthly cost. If you’re a first time home buyer, this is a great way you can get a little financial boost while purchasing your first home.
Check out British Columbia’s First Time Home Buyers’ Program and see if you qualify.
We hope those tips have inspired you as you look forward to purchasing your home and saving for your down payment. With some dedication and self-discipline, you’ll see the fruits of your efforts in no time.