Saving for a Down Payment

You’ve probably heard almost everybody say they are saving for a down payment or they don’t have enough saved up yet, and that’s probably got you asking questions such as what is a down payment, do I have enough, how will I know if I have enough.

What is a Down Payment?

A down payment is the amount of money put towards the purchase of a home which represents a part of the total payment. It is typically made in cash and the remainder of the payment comes from the mortgage loan, since not all of us have enough saved up to pay for a home entirely up front in cash.

In Canada, the down payment amount depends on the how you want to buy, with the minimum down payment being 5% of the home price. If you were able to put more than 20% of the home purchase price “down”, then you will be offered a conventional mortgage product from your lender. If your down payment is less than 20% of the home purchase price, you will be offered a high-ratio mortgage product from your lender, and they require you to buy mortgage default insurance

The Bigger the Better

When it comes to your down payment one thing is certain – the bigger the better. Why put more money down against the purchase of your home? The following reasons will answer your question:

• Lower monthly mortgage payments
• Pay less in interest
• With a down payment of 20% or more, you don’t have to buy default insurance

How to Save for your Down Payment

With the following steps, you can easily save for a large down payment:

#1. Get a Good Savings Account

And by good we mean an account with a high interest rate. Look at High Interest Savings Accounts, Tax Free Savings Accounts and Guaranteed Investment Certificates (GICs). These all tend to be safe investment vehicles that pay higher interest compared to your average chequing accounts.

Without doing too much research into house prices at this stage, come up with a rough idea of your ideal home value. If it’s $200,000 and you want to avoid paying default insurance, you need to save up 20% of that or $40,000. Now that you have a goal in mind, you can work backwards.

#3: Start Saving Today

Start to make regular payments into your savings account. Start with $100 a month and move up from there. But realize that if only save this amount, (and your goal is $40,000) it will take you roughly 30 years to hit your target – $100 a month just won’t cut it.

#4: Save your Cash Bonuses

A cash bonus is any cash you receive in a given year. This includes your tax return, an annual work bonus, even the money you got as a birthday or Christmas gift. Put all of these extra bonuses into your savings account and you’ll hit your goal a lot sooner.

#5: Cut out the Small Stuff

Limit yourself to one Starbucks coffee a week and put the money that you save aside. Pack your lunch instead of eating out and cut your shopping budget in half. If you put all of the savings toward your goal, you’ll be surprised at how quickly it adds up.

#6: Take Advantage of the HBP

The Home Buyers’ Plan (HBP) is a Government program to help first time home buyers save towards a down payment. You can withdraw up to $25,000 from your RRSP to put towards the down payment of your first home. A great way to save tax free. (Find out more by reading: Using for RRSP for your Downpayment >)

#7: Ask for Help

You may not have the luxury of going to your parents for some extra cash, but make it known to family and friends that you’re saving for a home. You might get cash in an envelope rather than gift certificates to restaurants that you don’t even eat at.