How to Save for a Down Payment for a Home in Canada

How to Save for a Down Payment for a Home in Canada

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Saving for a house in Canada? It’s no enviable task. But the wise sages behind MoneyWizard are here to let first time home buyers know that, if your purchasing strategy is on point, you’re making a wise decision! It’s rare to find a lower risk (albeit expensive), high-reward nest-egg better than owning a piece of property. Of course, buying a house starts with a savings plan to put away enough money to make a minimum down payment on a home. Depending on your strategy, successfully saving up for a down payment can be one of the most important steps in securing your financial future. When combined with financial instruments like registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), and mutual funds, homeownership may prove to be just as integral to your future. It will potentially support your retirement at a reasonable age. However, all this all begs the question—how are you supposed to save money for a minimum down payment to buy a home? After all, downpayments often constitute a significant percentage of the total price of a home. That kind of money is challenging to come by—especially when you’re navigating a turbulent economy in a country where living costs aren’t forgiving.

How Much Do You Need For A Down Payment? 

There are several answers to this question, depending on your financial situation, mortgage payments, and the property you’re buying.We’ll look specifically at the down payment options for first-time homebuyers, who—on average—spend ~$432,000 on their purchase. Let’s explain the necessary down payments based on the above average and depending on the various available financing plans:

High-Ratio Mortgages:

  • Requires a 5% down payment.
  • On average, this would cost first-time homebuyers $21,600 (+38% in five years).
  • The mortgage amount is $426,816.
  • The lowest nationally available 5-year fixed interest rate is 1.64% (amounting to $32,026 over the 5-year term at the time of writing).

Uninsured Mortgages:

  • This financing plan requires a 20% down payment.
  • On average, this would cost first-time homebuyers $86,400 (+38% in five years).
  • The mortgage amount is $345,600.
  • The lowest nationally available 5-year fixed interest rate is 1.84% (amounting to $29,666 over the 5-year term at the time of writing).

HELOC:

  • This financing plan requires a 35% down payment.
  • On average, this would cost first-time homebuyers $151,200 (+38% in five years)
  • The mortgage amount is $345,600.
  • The lowest nationally available HELOC rate is 2.35% (amounting to $32,384 over the 5-year term).
Not everybody is going to purchase at or below the average first-home price. So, it’s worth pointing out that only homes under $500,000 have the potential for a 5% minimum down payment. Whereas homes over that amount require 5% for the first half-million dollars and 10% for the remaining value. Lastly, the minimum down payment for any home over $1,000,000 is 20%.

Wipe Out Your Debt 

Do away with your consumer debts (namely, anything with high interest), so you can begin saving with a clean slate. It’ll be incredibly challenging to save when you’re paying 19% (at least) in credit card interest, for instance. Use the following two strategies to deal with these debts:
  • Using a balance transfer card
  • Consolidation loan

Cut Your Expenses 

Are you paying expensive rent? Then downsize to a cheaper place or move back in with your parents if that possibility is available to you. You can still pay rent, but it’ll be favourable unless mom and dad are ruthless capitalists). From there, see if it’s possible to do away with your vehicle altogether. That’s much easier if you live in the city.  Some experts believe it’s possible to save $5,000 per year living without a car. Of course, automobiles are often essential for families. In which case, try to share one car with your partner or buy something used (but still functioning optimally). Now, it’s time to cut back on eating out at restaurants. And do your best to save $15–20 per grocery trip.  Over the year, rigorous coupon clipping will save you hundreds, if not a couple thousand dollars. There are plenty of grocery apps available to help you with budgeting on this front. Alternatively, paying for groceries with a cashback credit card on top of frugal spending is another way to store up extra cash for your down payment. 

Borrow from your RRSP under the Home Buyers’ Plan. 

When buying your first home, you’re allowed to withdraw up to $25,000 from your RRSP.  There is one caveat: you have to pay this money back within 15 years, or else it’s viewed as earnings, and you’ll be stuck paying income taxes on the withdrawn amount.

Tax-Free Savings Account (TFSA)

Any money put in this account won’t be subject to income tax, making it far easier for your money to grow. This might seem like a no-brainer (and in most cases it is), but you should talk to your financial advisor before committing to this savings method.  Below are two other options that offer high financial yield under the right circumstances.

High-interest Savings Accounts:

  • Gives you the chance to earn considerably more interest than a standard account.
  • Before moving forward with this account, calculate whether the interest rate is favourable enough for you to make money after taxes and inflation. 

GICs:

  • A suggested alternative to a high-interest savings account.
  • GICs allow you to decide how long to store away your funds:
    • This period can be anywhere between 90 days and 10 years.
    • Note that longer terms yield higher interest rates (ie more substantial earnings).
  • Your interest-based earnings might get reduced if you cash out the GIC before the terms are done. 

Conclusion

For many Canadians, buying a home will be the most significant investment and substantial purchase of their entire lives. While it’s an opportunity to carve out your future, approaching the purchasing process with a sound strategy can quickly derail your finances. Such a strategy begins with compiling the necessary funds for your down payment. More specifically, you don’t want to land up in seas of credit card debt or paying sky-high interest on an unsecured personal loan. Instead, carefully scrimp, save, and follow the suggestions made throughout this helpful blog.


Additional Resources for First-Time Home Buyers

First-time home buyer? You probably have a lot on your mind. Thankfully, the financial sages behind MoneyWizard have got the resources, tips and financial support to help you on your journey! Buying a Home in Canada: First-Time Home Buyers
  • Start here! This step-by-step guide includes all the up-to-date information you need to help you make informed decisions and understand the home buying process in Canada… [Read more]
Are You Eligible For Incentives?
  • To make buying your first home more affordable, the government offers numerous incentives— tax benefits, rebates, tax credits, or ways to fund your down payment. Find out if you’re eligible… [Read more]
How to Get Pre-Approved for a Mortgage
  • Mortgage pre-approval is not only easier but faster than the mortgage approval process. It also expedites closing on a mortgage when you’re ready. In other words, a mortgage pre-approval is your true first step to owning a home. Learn how to get pre-approved today… [Read more]
How Much Home Can You Afford?
  • While some suggests that you can spend ~32% of your income on housing and still be in good financial standing, not everyone should take this advice. Are you ready to own a home… [Read more]
How To Get a Mortgage With Bad Credit
  • Lower credit scores attract higher rates—sometimes above ~10%. Regardless, you can still pursue your dream without waiting for your credit score to improve. And the financial sages behind MoneyWizard can help you obtain a mortgage—even with ‘bad’ credit…. [Read more]
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