Thinking of buying your first home in the next few years but wondering how you will come up with the minimum 5% down payment? You’re not alone. Saving for a down payment is one of the biggest barriers to home ownership for first-time buyers. But, as the saying goes, where there is a will, there is a way. With a little patience and discipline, you can meet your goal. Here are a few simple strategies to help you fast track your savings.
1. Determine Your Savings Goal
Before you start saving, it’s important to know exactly how much you need. The minimum down payment in Canada is 5% but, ideally, you should aim to save for a 20% payment to avoid the additional cost of CMHC mortgage insurance. For instance, with a home priced at $500,000, you will need to come up with $100,000 for the down payment. The good news is that this down payment doesn’t go anywhere; it’s sitting in your house and when you sell, you get it back as part of your equity.
It’s really valuable to ask yourself, “How much can I afford in a mortgage?” You need to understand your finances, all the expenses of a home, and keep a realistic goal so you can hit it.
2. Plan your timeframe
How long will it take to save for your down payment? If you plan on purchasing a home in five years, you’ll have to be prepared to save $20,000 per year ($100,000 divided by five years).
The more time you spend saving up, the more money you can save. And the more money you save, the less your mortgage loan will cost in the long run, in accrued interest.
3. Get a handle on your spending
Once you have a goal in mind, start tracking your current spending, set up a monthly budget, and identify areas where you might be able to cut back. For example, try packing your lunch instead of eating out. Leave your car at home and take public transit or bicycle to work. Get a cheaper cell phone plan. Cut the cord on cable television. You’ll be amazed at how quickly these savings will add up over time.
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4. Pick up a Side Hustle
Cutting back on your expenses alone might not be enough to reach your financial goal. You might also need to boost your income. Consider spending a few hours a week driving for a rideshare service, shopping or delivering meals for an online delivery service, walking dogs, pet sitting, tutoring … you get the idea. It doesn’t have to be forever, even picking up an evening, weekend retail job around the holidays for a few weeks will help you build up your down payment money.
5. Consider a Tax Free Savings Account (TFSA)
A Tax-Free Savings Account can also be a great place to set aside funds for your down payment. Introduced by the federal government in 2009, a TFSA allows you to save money without paying taxes on earned interest, so your money grows more quickly. And, unlike other registered plans, you can withdraw your money whenever you want without being taxed. Consult with your financial planner or advisor to find the best tax-free savings accounts in Canada.
6. Take advantage of a first time home buyers program
Another option for first-time homebuyers is the Home Buyer’s Plan, which allows you to into your Registered Retirement Savings Plan (RRSP) to help cover the cost of your new home. You can withdraw up to $35,000 tax-free, under the condition that you repay that money within 15 years, starting in the second year after you buy your home. If you don’t repay the money, it is treated as income and you will have to pay tax on the money you withdrew as though it were income. Check with your financial planner or advisor to see if this option is right for you.
The Bottom Line
While saving for a down payment can seem daunting, think of it all as preparation for homeownership. You’ll have all of those expenses after you buy your home too, but you’ll also have large expenses related to the home itself. So think of this as a practice run to prepare both your finances and your resolve for the extra responsibilities that homeownership brings.