Before you can get serious about buying a new home, you need to have your down payment ready. While it might seem a bit daunting, especially if you feel like you’re living paycheque to paycheque, you’ll find that staying focused and taking things step by step will help you reach your goals.
First Things First
According to Canadian regulations, you will need to have at least 5% of the cost of a home saved as a down payment. This is true for homes that are $500,000 or less, but if you’re interested in more expensive homes, you will have to save more – 5% of $500,000 plus 10% of the amount over $500,000 for homes under $1 million, and 20% for homes over $1 million. Browse listings of homes you might be interested in to get an idea of how much you will need to save for your down payment.
Of course, this is just a minimum amount. When you can afford to put more money down, you will have more equity in your home and lower monthly payments. It’s often worth it to save up a bit more if you can.
Getting That Down Payment
Most people will obtain their down payment from careful budgeting and saving money. Building up a sizeable down payment doesn’t happen overnight. It can take years of setting up automatic savings plans and making smart decisions about spending money. This often means eating out less or taking fewer vacations. Before you spend any money, ask yourself whether that money would serve you better in the down payment fund.
Another option is to borrow money from your RRSP. At this time, the Home Buyers' Plan allows you to borrow up to $25,000 from your RRSP to put toward a down payment. If you’re a couple, you can each do this in order to get up to $50,000. This program is only available to first-time home buyers or those who have not owned a home for the past five years.
Should You Borrow?
That instant influx of cash from your RRSP may be just what you need to put you over the edge and make buying a home affordable. It’s certainly a lot easier than saving up $25,000 on your own. However, it’s important to remember that this is a loan that you need to repay.
If you don’t repay this loan within 15 years, you will have to pay taxes on the money as though it were income. If you’re going to take this route, be sure that you can handle making regular payments to repay this loan in addition to your monthly mortgage payment and your regular RRSP payments.
Seeking Out Additional Help
In addition to the Home Buyers' Plan, there may be other options for those who need a little help with a down payment. For instance, some cities have interest-free loan programs to help first-time home buyers out with down payment costs. You also might be eligible for tax breaks, depending on your tax bracket and financial situation.
All of these things make homeownership a lot more affordable. Speak with a mortgage professional in your area about the types of programs that could be available to you.
If your dream home is going to require a hefty down payment that will take several years to save, you might consider starting with a smaller “starter home”. For instance, by purchasing a condominium, you will immediately have your own place, and the money you pay monthly toward the mortgage will start building equity. When you’re ready to move, you can use this equity as part of the down payment.
It’s still smart to keep saving up for a down payment on a bigger home even if you do purchase a starter home. You should also take a look at a mortgage amortization table to see how much of your home you will “own” after a few years. In those first few years of the mortgage, a big chunk of your monthly payment goes toward interest on the loan rather than toward the principal. If possible, paying a bit extra with your monthly payment will help you build equity more quickly.
Delivering the Down Payment
Keep the money you have saved up for your down payment in your bank account until the day you close on your mortgage. At this time, you will know the exact amount of money you need for the home and mortgage closing costs. You will have to withdraw this amount and present it at the final meeting.
Though you probably want to move into a new home as quickly as possible, it’s smarter to take things slowly. By carefully planning for your down payment, you will be in a better financial position when you finally do buy a house.