When it comes to buying a home, we understand there’s a lot to think about. The first step in any new home journey is to come up with a down payment. While this may seem like a big undertaking at first, you can make the process much easier (and quicker!) by arming yourself with a little knowledge ahead of time. Here are a few things you’ll want to know about before you start saving for your down payment.
Determine What You Want
Do some research so you’ll know what $200,000 will get you in the neighbourhood you want versus what you'll get for $300,000. This will give you a reasonable idea as to what to expect and what you’re comfortable paying.
Something to keep in mind here is that homes in communities closer to the downtown core will likely be more expensive. So, if you’re hoping for a single family home, you may have to pay more unless you opt for a townhome or duplex instead. Conversely, you might be able to afford a single family home much more easily in a developing suburban neighbourhood.
CMHC Mortgage Insurance
The main thing that’s often overlooked by those saving for a home purchase is CMHC mortgage loan insurance. This is required for any home buyer who puts down less than 20% of a home’s overall purchase price. You will be required to pay a monthly insurance premium on top of your monthly mortgage payment.
While you can go as low as five percent (the absolute minimum according to mortgage laws), the smaller your down payment, the higher your monthly fee. This fee will be added to the principal cost of the mortgage and, over a period of five-year amortization (for example), you'll pay interest on it.
What Can You Afford?
Keeping mortgage insurance in mind, you can begin to compare home purchase prices with how much you’ll want to come up with for a down payment.
For example, if you’re planning on making the minimum five percent down payment on a new $370,000 single family home, you’ll need to save $18,500. Over an amortization period of five years, you’ll pay $14,060 in mortgage insurance. If you were to put down a little more, say ten percent, your down payment would be $37,000, but you’d be paying almost $4,000 less in mortgage insurance ($10,323 over five years).
Tips on Saving
No matter how much you plan to save, breaking down your budget in a step by step savings plan is the best way to start.
Pay off your debt -This means everything from a few thousand dollars in credit card bills to your car payment. If you have debt from school you’re able to pay off at a low-interest rate, make a plan for this.
Make it automatic - It’s easy to forget or put off transferring money to your savings. Set an amount and commit to it. Put any extra money you earn towards the final goal.
Pay yourself first - Make sure the automatic deposit comes out the day you get paid. That way you’re saving for yourself before paying anyone else or buying anything. This will ensure you keep your commitment to stay on track!
Cash instead of gifts - It might seem strange to some people to ask for cash, but your family will likely be very supportive if they know you’re saving for a home. Be honest with them. Chances are they were going to buy you something anyway and every little bit helps when it comes to reaching your goals.
Spend less - One of the hardest parts of saving is the commitment to cutting back on the extras in your life. If you get your nails and hair done every few weeks, try doing it yourself. If your guilty pleasure and main expenditures are tools or gadgets, try using what you have instead of buying more. You can also try borrowing or buying used if you absolutely need to purchase something.
Work more - If you’re having a hard time crunching the numbers, one of the best things you can do is bring in more income. It can be something as simple as offering a service like writing resumes or book keeping. If you have a skill you can market on Kijiji, do it!
Look into government resources - From RRSP loans to tax credits, there are government programs for home buyers just like you.
There’s no time like the present when it comes to saving for your dream home. While it may seem like a long journey right now, stick to your budget and savings goals and you’ll get there sooner than you think.