Global News, March 3,2015- You’ve decided to get into the housing market, scouted out neighbourhoods, maybe even attended a few open houses – but now reality is setting in. You need a down payment to buy a home, and you have nothing saved.
Read on for strategies and tips for saving for a down payment.
Pay off your credit card debt
If you have credit card debt, pay it off before focusing your attention on home ownership. For one, once your debts are paid off, you’ll have more money freed up to put toward your down payment. If you try to secure a mortgage with too much debt you may not qualify.
Get your priorities straight
If you have decided that buying a home is your top priority, then you will most likely have to cut back on other spending.
Big ticket items like cars and vacations may have to be put off as you stow away cash for your down payment.
Create a budget and take a look at how you spend your money each month. Things like dining out at restaurants and shopping for non-essential items are easy expenses to cut back.
Do you smoke? What better time to quit? Not only will you improve your health, regular smokers could save thousands of dollars a year by kicking the habit.
Downsize your lifestyle
Are you a two-car family? Now would be a good time to consider getting rid of one. Vehicles cost Canadians thousands of dollars a year in car payments, repairs, insurance and gas. If you have one vehicle, consider giving it up for public transit (although that’s not always a viable option in some parts of the country).
Another way to downsize your lifestyle is with your living arrangement. If you’re currently renting a two-bedroom apartment, consider moving into a one-bedroom until you can get your down payment together. Those who are really serious about saving up for their home purchase have even moved back in with their parents on a temporary basis.
If you and your partner are buying a home together but currently live in separate residences, move in together to cut your monthly expenses in half.
Embrace frugal living in other ways such as swapping fancy vacations for staycations, going to the library instead of purchasing books, and seeking out cheaper forms of exercise (compare the cost of running outdoors to a monthly gym membership or annual green fees).
If you happen upon any “found” or “free” money – such as work bonuses, raises or gifts – stow it away for your down payment and resist the temptation to spend it elsewhere.
Your goal should be to save as large a down payment as possible. The bigger your down payment, the smaller your mortgage loan, which means you’ll save thousands in interest charges over the length of your mortgage.
Your down payment must be at least five per cent of the purchase price of your home, however, if you have anything less than a 20 per cent down payment you’ll have to purchase mortgage default insurance, or CMHC insurance.
This insurance protects the mortgage lender should you default on your mortgage payments. Mortgage default insurance shouldn’t be confused with home or property insurance. It does not protect the homeowner and it is completely avoidable.
The amount you pay for this insurance is determined by the amount of the mortgage loan and the size of your down payment.
Say, for example, you wanted to buy a house listed at $250,000. If you only had five per cent ($12,500) saved for your down payment, you’d end up paying an additional $7,481 in mortgage insurance. But if you saved 20 per cent ($50,000) you wouldn’t pay anything in mortgage default insurance (you can try out this handy calculator here).
Because most people can’t afford to pay mortgage default insurance in cash, this cost is typically added to your total loan and amortized over the length of your mortgage.
Calculate how much you need
If your goal is to save 20 per cent, calculate it by dividing the price of the house by 100, then multiplying that by 20.
For example: $250,000 / 100 x 20 = $50,000
If you’re starting from scratch, $50,000 may be a big number to swallow. But if you have set out a reasonable time frame to save for your down payment, it becomes more palatable.
Say you want to buy a home in five years. Figure out how much you’ll have to save each month over those five years to get your 20 per cent. ($50,000 divided by 60 months = $833.33 per month -a significant amount to be sure).
Now that you know how much money you’ll need to save each month, you can consult your budget and your priorities to see where you can cut back.
Borrow form your RRSP
If getting to 20 per cent by pinching your pennies just isn’t a reality, you could choose to borrow money from your RRSP to put toward your down payment.
Canada’s Home Buyers’ Plan (HBP) allows first-time home buyers to borrow up to $25,000 from their RRSP to buy or build a home. You must not have owned a home in the last five years and you must repay the money within 15 years. For more information on the rules surrounding the Home Buyers’ Plan, consult the Canada Revenue Agency.
Some people may recommend opening up a line of credit or securing a bank loan for your down payment, but this decision shouldn’t be taken lightly. When you borrow money from your RRSP or bank to bolster your down payment, you are adding an additional debt on top an already hefty mortgage debt.
Some experts advise that if you cannot save enough money for a down payment, you may need to look closely at your finances to determine if you can handle the long-term costs of home ownership (including property taxes, insurance, maintenance, utility bills — all of which are in addition to your mortgage payments).
A final tip – just because you can get a mortgage doesn’t mean you can afford it. Make sure you are aware of all of the costs associated with buying and owning a home. You can reference this list as a start.