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Saving for a Down Payment

Are you planning to buy a home? You'll need to shell out for at least part of your purchase up front. Saving for a down payment is an important part of the home buying process - and the size of your down payment can even impact how much of a mortgage you qualify for.  But how much do you need to save? Read on for our breakdown.

What is a Down Payment?

It's highly unlikely (especially in very expensive markets like Toronto and Vancouver) that you'll be able to purchase your home without taking out a mortgage. Your down payment is the amount of money put towards the purchase of a home, which represents a part of the total payment. It is typically made in cash and the remainder of the payment comes from the mortgage loan.

In Canada the down payment amount depends on the how you want to buy, with the minimum down payment being 5% on the first $500,000 of the home price and 10% on any portion exceeding $500,000, up to $1 million (home priced above $1 million require a minimum 20% down).

If you are able to put more than 20% of the home purchase price, you will qualify for a conventional mortgage product from your lender. If your down payment is less than 20% of the home purchase price, you will be offered a high-ratio mortgage product from your lender, and they require you to buy mortgage default insurance.

The Bigger the Better

When it comes to your down payment, bigger is better. Putting more money down against the purchase of your home has lots of benefits, including:

  • Lower monthly mortgage payments
  • Pay less in interest over time
  • With a down payment of 20% or more, you don’t have to buy default insurance

How to Save for your Down Payment

With the following steps, you can easily save for a large down payment:

#1. Get a Good Savings Account

And by good we mean an account with a high interest rate. Look at High Interest Savings Accounts, Tax Free Savings Accounts and Guaranteed Investment Certificates (GICs). These all tend to be safe investment vehicles that pay higher interest compared to your average chequing accounts.

#2: Set a Goal

Without doing too much research into house prices at this stage, come up with a rough idea of your ideal home value. If it’s $600,000 and you want to avoid paying default insurance, you need to save up 20% of that or $12,000. Now that you have a goal in mind, you can work backwards.

#3: Start Saving Today

Start to make regular payments into your savings account. For example start with $250 a month and move up from there. But realize that if only save this amount, (and your goal is $120,000) it will take you roughly 40 years to hit your target - $250 a month just won’t cut it.

#4: Save your Cash Bonuses

A cash bonus is any cash you receive in a given year. This includes your tax return, an annual work bonus, even the money you got as a birthday or Christmas gift. Put all of these extra bonuses into your savings account and you’ll hit your goal a lot sooner.

#5: Cut out the Small Stuff

Limit yourself to one Starbucks coffee a week and put the money that you save aside. Pack your lunch instead of eating out and cut your shopping budget in half. If you put all of the savings toward your goal, you’ll be surprised at how quickly it adds up.

#6: Take Advantage of the HBP

The Home Buyers’ Plan (HBP) is a Government program to help first time home buyers save towards a down payment. You can withdraw up to $35,000 from your RRSP to put towards the down payment of your first home. A great way to save tax free.

#7: Ask for Help

You may not have the luxury of going to your parents for some extra cash, but make it known to family and friends that you’re saving for a home. You might get cash in an envelope rather than gift certificates to restaurants that you don’t even eat at.

Penelope Graham

A first-time homeowner and newbie investor, Penelope Graham is the quintessential millennial, navigating the world of personal finance and wealth management. A self-professed monetary policy nerd, she follows the often-controversial housing market closely and specializes in mortgage, credit card and personal finance news.

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