We understand, saving for a down payment for your first home can seem overwhelming. You may wonder how you are ever going to transition from being a renter to a homeowner when all your money is going towards someone else’s mortgage. But there’s no need for despair. There are many things you can start doing today that will help you save for tomorrow’s home purchase.
According to well-known financial author and businessman Dave Ramsey, you should first look at how much you are going to need. Knowing your goal upfront will save you from disappointment later.
How Much Should You Really Have for a Down Payment for a Home?
In Canada, the minimum amount you will need for your down payment depends on the purchase price of the home you want to buy.
For amounts under $500,000, you will need five per cent down.
For amounts between $500,000 and $999,999, you will need five per cent for the first $500,000 and 10 per cent for the portion between $500,000 and $999,999.
If the home is more than $1 million, you will need 20 per cent of the purchase price.
What if You Don’t Have the Minimum Requirement for a Down Payment?
No need to fret. You may qualify for a High Ratio Mortgage which will allow you to borrow up to 95 per cent of the cost of the home. Because this is considered a higher risk loan, you will need to purchase mortgage insurance and without the minimum down payment, you may be left with less options on interest rates and terms.
As you know, the amount of money you put forward as a down payment is subtracted from the total price of the home so the more the better in reducing your monthly payments. Map out how long it is going to take you to save the required amount. It is common for it to take two to three years. Keep this in mind before you start your search.
When looking for how much you will need, you will undoubtedly discover what you can afford. Setting your down payment goal goes with what you can afford. Most experts agree you should stick with less than 25 per cent of your monthly take-home pay – including the mortgage payment, private mortgage insurance, possible Homeowners Association (HOA), property taxes and home-owners insurance.
Keep in mind, you may need additional mortgage insurance if the bank feels your down payment is too low or you may find making payments challenging. In other words, the more you can put down, the better.
With Your End Goal in Mind, Let’s Look at Some Creative Ways to Save
1. Pay-off High-Interest Loans and Credit Cards
Entering the home buying arena will be less stressful if you don’t have a pile of debt hanging over you. Debt will influence what you can afford and how quickly you can get into your own home. Take the extra time and get out of debt. While you are at it, have a small emergency fund set aside too. Once done, you are ready to start putting funds towards your down payment.
2. Automatic Transfer of Funds Equals Automatic Savings
Having a budgeted amount withdrawn automatically from your paycheck and redirected to your savings will be a great step. You will get used to this lower pay and adjust spending accordingly. Before you know it, you will have substantial funds in your savings account.
3. Find an Income Booster
Consider taking on a part-time job or side hustle. Turn a hobby into some extra income. Perhaps dog walking on the weekends or becoming a weekend referee is within your realm of interests. Regardless, choose something you enjoy, and it won’t feel like extra work. Remember to put this extra income into your savings.
4. Move to a More Modest Rental and Cut Expenses
Look at your current expenses, develop a realistic budget, and then start living within those means. You might have to look for a less expensive rental property until you are ready to buy or reduce the number of dinners out. You will be surprised at how those little expenditures add up. Remember to take the extra money you are saving and redirect it to your savings account. Otherwise, it will disappear on morning drive-thru coffees.
5. Have a Tax-Free Savings Account (TFSA)
When you put money away in a savings account you are taxed on the interest generated on that money. With a Tax-Free Savings Account (TFSA), the funds are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account is generally tax-free, even when withdrawn.
Juan Munoz, Financial Advisor with Industrial Alliance in Quebec, says TFSAs are also a way to keep your savings out of reach. The money will be kept separate from your regular savings and you can set it up so automatic withdrawals are made from your primary bank account. Your money gets set aside before you have a chance to spend it. It’s also motivating to see your TFSA balance growing!
Munoz cautions against depositing savings in Money Markets if you are buying a home within a short period of time. Money Markets funds are great for having access to your money quickly, but the value fluctuates and you may not be able to wait for the market to rebound.
“In 2018, the money market was doing great. Different from the last three months, when the market has shown a decline,” cautions Munoz. “With money market investments instead of creating extra funds for your down payment. It is a risk.”
6. Borrow from Registered Retirement Savings Plan (RRSP)
In March 2019, the amount you can withdraw from your RRSP for a down payment without being taxed increased to $35,000. Keep in mind, this money must be repaid within 15 years or you will need to pay income tax on it.
“It is a great way to get your hands-on significant down payment funds quickly,” adds Munoz.
7. First-Time Home Buyers Program
Another great option to consider is the First-Time Home Buyers Program. This incentive makes it easier for you to buy a home and lowers your monthly mortgage payment. This program is a shared equity mortgage. Meaning, you are sharing the ups and downs of your property value with the government. The program offers five to 10 per cent of the homes’ purchase price to put toward a down payment. These additional funds will help you lower your mortgage carrying cost. You pay back the same percentage of the value of your home when you sell it or within a 25-year window, whichever comes first.
In addition to the federal FTHB program, check out similar programs in your city. Often, cities will offer additional incentives to first-time home buyers. Sometimes it is to revitalize or redevelop a neighbourhood that has become less popular over time. These programs usually have very specific requirements so check out city hall to see if they are the right fit for you.
Examples of programs in the past include Winnipeg, Manitoba and Surrey, British Columbia. They have offered up to $20,000 under their home buyer programs. Interesting note: the money is repaid without interest over a predetermined number of years.
Decide what you can afford, determine your budget, start saving, and look to provincial and federal programs that exist for the purpose of helping first-time home buyers save for their down payment. With these things in mind, you will be well on your way to drinking your morning coffee in your own home!