It’s one of the biggest challenges associated with buying a home. Saving for your down payment is bound to take time, and there may be some frustration along the way. The good news is, there are steps you can take to make steady progress toward your goal—and set the scene to purchase your dream home!
Whether you’re currently saving up for your down payment or you’re planning to start soon, here’s what you need to know about how to save for a down payment…
Your down payment, explained
Let’s start with the basics: what is a home down payment? If you’re unclear on the concept, you’re not alone. Put simply, we’re talking about the initial money you’ll put towards the purchase of your home. Your lender will cover the rest (which you’ll pay back through your monthly mortgage payments).
Your down payment amount will depend on the purchase price of your home. For properties under $500,000, it’s 5 percent. For those priced between $500,00 and $999,999, it’s 5 percent on the first $500,000 and 10 percent on any amount above that. Lastly, for homes over $1 million, you’ll need a down payment equal to 20 percent of your purchase price.
We’re talking about a significant chunk of change, which is why it pays to save strategically! Here are a few tips.
1) Know your priorities
The first step towards reaching your down payment goal is knowing your priorities. If you want to succeed, reducing your spending is going to be key.
If you order food or shop online, can you cut back significantly? If you’re thinking of taking an expensive vacation in the future, can you opt for a less-costly option instead? Mentally committing to homeownership will help you tighten your belt and save what you need to make it happen.
2) Pay off your credit cards first
Paying interest can make saving money incredibly difficult. That’s why we suggest paying down your credit cards first. Start with high-interest debt in small amounts, and use each payment to tackle the next one quicker.
Being in debt can prevent you from not only saving the money you’ll need for your down payment, but from qualifying for a mortgage at all. Fortunately, taking the repayment process one step at a time will allow you to make significant headway.
3) Borrow from your RRSPs
Borrowing from your Registered Retirement Savings Plan (RRSP) is a great way to save up for your down payment. Not only that, but the federal government has recently made it easier to put part of your RRSP towards home financing.
As of last March, first-time buyers can take out $35,000 (tax-free) for their down payment. If you’re purchasing a home with another first-timer, they can also withdraw from their RRSP for a combined amount of $75,000.
4) Sell a car
Does your family own two or more vehicles? If so, selling one could reduce your expenses significantly—which could mean you’ll have more money to put down on a home.
Between monthly car payments, insurance costs, gas, and ongoing maintenance, driving can be expensive. Cutting those costs in half can boost your ability to save by thousands of dollars a year. So you may want to think about alternative ways to commute!
5) Consider the First-Time Home Buyers Incentive
In September, the federal government launched the First-Time Home Buyer Incentive (FTHBI)—a program that provides interest-free loans! If you qualify, you could receive 5 percent of the purchase price of an existing home, or 10 percent of a brand new one.
Another benefit? You won’t have to pay back your loan for 25 years (or until you sell, whichever comes first). Needless to say, this program could make it easier to save up for that down payment quicker.
The downside is, many homes aren’t affordable enough to qualify. That said, if you’re a first-time buyer, the FTHBI is definitely worth asking your agent about!
Preparing to buy a home? We know the process inside and out, and we’d love to walk you through it! Get in touch to get started!