With mortgage rates in a seemingly perpetual rock-bottom state, owning your own home seems to make so much sense. Why throw away rent when you could be investing in your own place over the years?
The big barrier to it all is you can’t just walk into a house or condo and start making monthly mortgage payments. You need a significant down payment to get things rolling. Here are some ways to pull it together, faster.
The Bare Minimum
Since housing prices have been on a tear over the last decade, that down payment is significant. According to Canadian banking laws, you need a 20% down payment when you buy a home. If you don’t have that much, you need to get mortgage insurance through the Canadian Mortgage and Housing Corporation, plus a minimum of five percent down.
As the average house price in Canada hovers around $350,000, you need to save around $17,500 to get into a house. And remember, it’s actually better to bring more to the table. Putting down a scant five percent leaves you with a huge mortgage and might put you too close to the wire to deal with things like closing costs (lawyers’ fees, taxes and other costs you incur when you buy) and home renovations and repairs. (Unless you’re moving into a brand new home, you’ll likely be doing a few upgrades once you move in. And even new home buyers often find themselves shopping for things like shelving, paint and lamps.) Also, the smaller your down payment, the larger your mortgage insurance payments.
A recent survey by TD Canada Trust reveals that 60% Canadian homeowners wished they had saved up a larger down payment. Morale: save as much as you can, and start now.
The smartest move you can make is to take a concerted effort to save. That means setting up automatic transfers from your main chequing account to another account or fund.
Make sure you can’t lose your money: if the market drops right before you buy, your real estate deal could be at risk. Also, be careful about locking in all your money. Many financial services products are not that flexible and you might not be able to get your money when you need it
Some savings vehicle options:
High interest savings accounts: These don’t offer much in the way of interest right now usually under 2 percent. Be careful about fees and the temptation to take your money out. But it’s also easy to get your money when you buy and you won’t lose.
Canada Savings Bonds: You don’t need to invest much in this classic savings product; just be sure to buy a bond you can cash at any time. You never know when you might find the perfect house and need a deposit right away.
GICs: They're referred to as "guaranteed" for a reason! Keep in mind, though, that while guaranteed interest certificates are often a great way to save, it's important to be careful about maturity dates. You might not be able to get your money when you need it.
Money markets: These investment products are usually quite stable and flexible. Be sure you can take your money out any time.
The RRSP Connection
First-time buyers in Canada are permitted to withdraw as much as $25,000 tax free from their registered retirement savings plans (RRSPs) under the Home Buyers’ Plan. But you must pay this money back over 15 years.
That’s a challenge when you’re dealing with a new home. And when you pay that money back, remember you’re not actually building your retirement savings, nor are you making interest on that money, as it’s no longer invested.
This is a great program but one you need to leverage with caution: best to mix a separate savings program with RRSP withdrawals so you have to pay less back.
The Truth: It Takes Time
The best ingredient in a savings strategy is patience. It takes years to save up enough money to buy a home in Canada. Getting in the habit of saving, curbing your spending and preparing yourself financially and mentally for homeownership is a gradual process.
The more disciplined you are, and the more patient, the more likely you’ll be to save enough and be truly ready for the challenges ahead.