Saving for a down payment for a home isn’t always easy, but it’s not as difficult as you think. Whether you are a first-time buyer or returning to homeownership, saving for a down payment can seem overwhelming! Purchasing new or used? The more of a down payment you put down, the better your options are and the amount you invest can affect your mortgage rates.
Minimum down payment requirements:
For new homes that cost up to $500,000, the minimum down payment is 5%
For new homes that cost more than $500,000 and less than $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance
You might need some help from a financial expert, but these three easy steps could be an excellent way to start.
Step 1. Create a Budget & Cut Unnecessary Spending
There are many ways to save money and it really can be as easy as packing your own lunch instead of eating out or riding your bike to work during the summer months. However, if you want to get serious about cutting your expenses and saving more money, then follow these two things:
1) Create a budget and stick to it – this will help you see where your money is going and what areas need improvement. Set a monthly savings goal, track your success and make sure you stick to your set budget.
2) Cut unnecessary spending – Think about the ways you can reduce your spending. Bring lunch to work or buy second-hand clothes and toys. Think about cost-saving options like borrowing books from the library or taking a staycation.
Step 2. Get Rid of Unwanted Debt from Your Life
Paying down debt can seem like an endless struggle but, with some self-discipline and faith in yourself, your financial picture can change for the better in just a matter of months. The key to success will be to establish a debt plan and stay committed.
With the budget you’ve created, you’ll determine if you have a surplus, which you can put towards paying off your debt; or a shortfall, which means it might be necessary to cut back on regular expenses. Reduce your debt by controlling your expenditures and paying off your high-interest debts as they will be the most expensive over time.
Step 3. Utilize Programs Available
There are different programs and incentives available that can help you save money for your down payment.
Registered Retirement Savings Plan (RRSP) – If you have an RRSP, you can withdraw up to $25,000 to buy your first home. The only catch to this program is that you have to pay the money back to your RRSP within 15 years. If you do not repay the money, it is treated as income and you will have to pay tax on the money you withdrew as though it were income.
Tax-Free Savings Account (TFSA) – this lets you grow your savings without paying income tax and withdraw whenever you wish — making it a great place to set aside your savings for a big purchase, such as buying a new home. Regardless of your income, investment in this account does not affect your income taxes. Currently, Canadians can contribute up to $6,000 but that limit can change so double-check before you contribute.
First-Time Home Buyer’s Incentive (FTHBI) – If you have put aside at least 5% of the purchase price of a home, the government can give you an incentive of an additional 5% – 10%. These additional funds will increase your down payment, which would then lower your monthly mortgage payments. However, there are some strict conditions to qualify for the FTHBI. You must be a Canadian citizen or permanent resident and a first-time homebuyer. Your income cannot exceed $120,000 unless you are buying in Toronto, Vancouver or Victoria, where the cap is $150,000. This program is a shared-equity mortgage, so the government has a share in any increases or decreases in the property value.
Saving for a down payment can be daunting, but it is worth it in the end. If you can set aside a little extra money each month, it will go a long way toward achieving your home ownership dreams!