One of the first steps in the homebuying journey is saving for a down payment. Coming up with this amount, especially if you’re purchasing your first home and don’t have home equity to draw on, can seem like a daunting task — but it doesn’t have to be if you have a good game plan. Read our advice on how to start your home buying journey.
What's a down payment?
A down payment is the amount of money you’re putting toward the purchase of your home. The minimum amount you need for your down payment depends on your home’s purchase price.
How much of a down payment should I have?
While options for a lesser down payment may seem tempting (and may even make sense), the size of down payment you can afford now can have a long-term impact on your finances, determining your monthly mortgage payments and initial home equity.
In addition, if you’re making a down payment under 15-20% of your home’s cost, you will likely be required to have mortgage default insurance. This is a type of insurance that protects the financial institution in case a borrower defaults (is unable to make payments) on their mortgage. Since you are required to pay the insurance premium, insured mortgages are more costly. Your lending specialist can walk you through how much your premium would cost, depending on the size of your down payment.
HOT TIP: Whatever percentage you choose, it’s important to also account for closing costs. These are the extra administrative and legal fees above your down payment that you’ll pay when buying a home. These costs may include taxes, land surveys, title searches, appraisals, home inspections, and insurance. It’s a good idea to budget an extra 2-3% of your purchase price to account for these expenses.
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Seven ways to help save for your downpayment
1. Test-drive your budget
The first step in saving is to determine how much you will need. Review your budget, evaluate your income and expenses, and determine how much house you can afford. Try to deposit an amount similar to your mortgage payment into a savings account every month. Another idea is to deposit the cost of your property taxes, so you get comfortable adding that to your monthly costs.
Try our Home Affordability Calculator to see how much home you can afford and try to deposit the cost of your property taxes so you get comfortable adding that to your monthly costs. Try our Savings Goal Calculator. It will help you determine how much money you'll need to save to make your dreams a reality.
HOT TIP: Not sure where to start? Use our Budget Calculator to see how much you can budget each month based on your monthly income and expenses. Read our budgeting articles for tips on how to build a better budget.
2. Automate your savings
Commit to saving first by automating. It’s easy to set up a pre-authorized debit from your chequing to a high-interest savings account. Or consider moving money into a TFSA, which will give a higher rate of return on your investment, boost your savings, and shelter your savings from taxes. Call 1.800.728.6440 or book an appointment to set up pre-authorized transfers to your savings.
3. Look for ways to cut back
Take another look at your budget and see if there are ways to trim your expenses, however small. Here are a few questions to get your brain churning:
- Are you paying for any subscriptions you rarely, if ever, use?
- Are you able to be more planned with your meals, or keep on-the-go items at home so you don’t have to eat out as frequently?
- Can you find creative ways to spend less on groceries? This could include buying perishables only as you need them, being careful to stick to your shopping list, and checking the weekly flyers for deals.
- Are you paying for a phone or internet package that includes way more bells and whistles than you need? If you downgraded to a plan with less data or a slower internet speed, would it affect your lifestyle in any way?
- Are there certain stores — online or physical — that are a trigger for you to spend more than you should? It’s okay if your Kryptonite is the local bookstore, hardware outlet, home décor boutique, or online video game store. Simply consider limiting the amount of time you spend shopping at those places or bring a “support person” who can help keep you accountable to your budget.
4. Pay down high-interest debts
The reason for this is twofold: One, debts like credit card debt, payday loans, lines of credit, and store accounts get in the way of your savings and can cost you more than you are setting aside for your down payment. If you are carrying a substantial amount of debt, it may be wise for you to pay this off before you buy a home. Need advice for paying down credit cards, or other debt? Read SCU's 5 tips for paying down credit card debt. You may also want to consider a consolidation loan to reduce monthly payments. Remember, there's more than one way to get ahead. Call 1.800.728.6440 or book an appointment to learn more.
The second reason is that paying down debt boosts your credit score and ultimately improves your mortgage eligibility. When looking at a mortgage application, a lending specialist will check something called your Total Debt Service Ratio (TDSR). This is the percentage of your gross income spent paying down debt. It’s recommended you don’t exceed more than 40% of your income on debt. However, you may want to aim for a lower percentage so you’re able to put more money into savings, and to ensure that when you do buy a home, you’ll be able to make your payments. Learn how to improve your mortgage eligibility.
HOT TIP: Our lending specialists are experts who not only want to help you buy a home but can also give you guidance on how best to tackle the debts you currently have. Book an appointment today to discuss your financial credit history, and ways to pay down debt.
5. Invest your extra income
As you work toward your savings goal, consider setting aside any “one-time” income that comes your way. Bonuses, tax refunds, gifts, and side-income earnings can substantially move you toward your goal. This may even include tackling that spring cleaning project you’ve been planning for the past three years and selling items you don’t need at garage sales, online marketplaces, or used clothing stores.
6. Take advantage of first-time homebuyers’ programs
If you’re a first-time homebuyer, two accounts can help make your home purchase more affordable. The first is your RRSP. Through the Home Buyers’ Plan (HBP), you can withdraw up to $60,000 to top off your savings and increase your down payment. . This will reduce your monthly payment and give you room in your budget to pay back your RRSP over time. Keep in mind you will have to pay back the funds within 15 years. Alternately, you could claim that years’ repayment as income and pay tax on it. Learn more about the Home Buyers' Plan from the Government of Canada website.
Of course, another great option is the new First Home Savings Account (FHSA), a registered savings account that allows you to save up to $8,000 annually and $40,000 for a lifetime to use toward the purchase of your first home. Contributions made to the FHSA are tax-deductible and withdrawals used to purchase your first home, including the investment income, are non-taxable. Unlike with the HBP, you do not have to repay the funds.
7. Set goal milestones
Remember to celebrate! Saving toward a long-term goal like a house can be challenging. Finding important milestones to celebrate can keep you on track.
Finally, remember to celebrate! Saving toward a long-term goal like a house can be challenging. Finding moments to celebrate reaching important milestones can keep you on track.
Take the next step
When you’re ready to take the next step towards home ownership, call 1.800.728.6440 or contact us by clicking the button below to fill out a contact form, or book an appointment now.
