Planning to buy a home in Canada? Plan to start saving early!
The average price of a home in Canada climbed to $504,458 in June 2017, a 0.4% increase over the previous year. While average prices vary across provinces, the general trend for prices has been up. New home buyers will require a fairly hefty sum of money in down payment if they are planning on getting a traditional or conventional mortgage.
If you’re buying a house that is less than $500,000, the minimum down payment required is 5%. For homes priced between $500,000 and $1 million, a down payment of 5% is required on the first $500,000 plus 10% for the remaining portion over $500,000. When the purchase price of the home is $1 million or more, the minimum down payment required is 20%.
When your down payment is less than 20% (i.e. 5% to 19.99%), your mortgage is referred to as a high-ratio mortgage, and you’re required to pay for mortgage loan insurance (aka mortgage default insurance). Depending on where your down payment falls in the 5% to 19.99% range, your mortgage default insurance premium is anywhere from 2.8% to 4.00%.
If you choose to go with a conventional mortgage (i.e. put down 20% or more of the purchase price of the house), you are generally not required to obtain mortgage default insurance. To determine how much you will need to save in preparation for buying a house, you need to ask yourself the following questions:
- How much home can I afford?
- How soon do I need/want to buy a home?
- What type of mortgage do I want to obtain – conventional or high ratio?
- How much do I need in down payment?
- How much do I already have saved for down payment?
- What are my potential closing costs (1.5% – 4% of the purchase price)?
How To Save Up For Your Down Payment
1. Budget – Set a Savings Goal – Save!
Good ol’ savings, eh? You already know how much funds you need and when you need it by. It’s time to start saving up to reach your goal. To start, identify your income, expenses, and what’s left after deducting your expenses.
The equation looks like this: Income – Expenses = Leftover for savings. To increase your savings on the right hand side, consider cutting down on your expenses. Suggestions include spending less on toys, vacation, gifts, clothes, food (pack a lunch), and avoiding spending on big-ticket items that can wait for later.
Another strategy to increase your savings is to increase your income…more on this later. To expedite your savings in general, consider setting up an automatic payment plan. I find this to be the easiest way to put money aside and stay disciplined.
2. Use That TFSA
Following from budgeting and savings above, using the Tax-Free Savings Account ensures you can keep 100% of the growth earned on your savings. This will help you reach your savings goal faster! If you have been eligible to contribute to a TFSA since its inception in 2009, you now have a total contribution room in 2017 of $52,000. Except for a few non-qualified or prohibited investments, you can invest in a wide selection of investment assets using your TFSA. Ensure your savings or investment portfolio reflects the time horizon you have in mind for buying your home.
3. RRSP and the Home Buyers’ Plan
You can borrow up to $25,000 from your RRSP to put towards your down payment ($50,000 for a couple). The Home Buyers’ Plan is a program under the RRSP that enables you to withdraw funds from your RRSP tax-free when you’re buying a home. You have up to 15 years to pay back the amount withdrawn.
4. Additional Streams of Income
Going back to “Income” in the equation: Income – Expenses = Leftover for savings… increasing your income is one way to reach your down payment savings goal faster. This may involve taking on a second or part-time job, taking on a side-gig or freelance work, etc. When your income increases, the tendency is to want to spend more as well and increase your expenses. You will have to be deliberate about saving your additional income.
5. Windfalls and Monetary Gifts
When you come by monetary windfalls or gifts, consider adding them to your savings. These can include birthday and wedding gifts, workplace bonuses and commissions, inheritances, tax-refunds, or income from sale of unused items.
A mortgage is serious business and saving for a down payment can take time. Planning ahead by assessing your finances, budgeting, and setting up a savings account with an automatic payment plan, will get you there eventually. Consider buying a home you can afford, and remember, you cannot afford to forget about closing costs!