Saving the down payment to buy a home can seem overwhelming. First time home buyers and those who have gone through the process before can experience the same anxiety, but it doesn’t have to be that way. Sometimes saving for a down payment is as simple as making small changes to your budget or exploring other financing options. Both could help you save more money and reduce the amount of mortgage you need.
What is a down payment?
A down payment is the amount of money you put towards the purchase of a home. Your lender deducts the down payment from the purchase price of your home. Your mortgage covers the rest of the price of the home.
The minimum amount you need for your down payment depends on the purchase price of the home.
- For homes that cost up to $500,000, the minimum down payment is 5%
- For homes that cost more than $500,000 and less than $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance
- For homes that cost $1 million or more, the minimum down payment is 20%
How your down payment affects the total cost of your mortgage
The larger your down payment, the less you’ll pay in mortgage insurance premiums. Mortgage default insurance protects the lender in case you default on your mortgage. If your down payment is less than 20% of the purchase price, you must pay for mortgage default insurance. The fee you pay for mortgage default insurance is called a premium, which typically ranges from 2.8 – 4.0% of your total mortgage.
10 tips for saving for a down payment
- Pay off your high-interest debts as fast as you can. The more you pay off these debts, the more you save on interest.
- Make a reasonable budget. Identify areas where you spend too much and lower your budget in these categories.
- Set up automatic transfers on payday to your to your savings account. Once you get used to it, you won’t even think about this money anymore.
- Find an income booster such as a second part-time job or offering a service in your community.
- Move to a more modest rental while you save for a down payment or get a roommate to help cut your rent in half. Move in with your parents if you have to!
- Downsize your vehicle to one that’s more fuel efficient and lower in insurance.
- Sell other big ticket items. The best way to decide what you can and cannot part with, is to ask yourself “Does owning a home mean more to me than this thing I love?”
- Put away every bonus or unexpected money you receive. Don’t look at this money as a reason to spend.
- Save your money in a TFSA or RRSP. The Canadian government allows you to withdraw up to $35,000 from your RRSP to put towards your down payment on your first home.
- Ask for a raise. If successful, take the additional money each money and put it into your savings account.
When you break it down like this, saving for a down payment on a home doesn’t seem so daunting. It’s totally doable for most Canadians and it all comes down to how committed to homeownership you are.
Tatum Neufeld, BComm
Mortgage Broker • Mortgage Tailors