Top 10 tips to save for a down payment
One of the first steps to buy a home is to save for a down payment.
A down payment is the first step in the home buying process.
What is a down payment? It is the initial payment made when buying a house. Think of it as a deposit for your real estate purchase. With a down payment, you will be a serious buyer in the eyes of both the lender and the seller.
But the important thing to note about down payments is that it will come from your own savings.
Saving money should be a priority for future homeowners. You should have a goal in mind and start as early as you can. The more you save, the better. You can easily set savings goals, using this tool from the Government of Canada.
How much should you save? It depends. The standard number is 20% of the property's value. For example, if the listing price is $478,888, you will need to save for a down payment of $95,777.6. You can go as little as 5%, but it is not recommended since you would have to get mortgage insurance. A higher number than 20% is your best move. With a larger down payment, you will have to borrow less money, and you will have lower monthly mortgage payments.
Here we tell you how to save for a down payment. Your budget might be tight for a while and sacrifices will have to be made, but all you need to do is remember that the savings you make are all going not towards another expense, but towards an investment.
1. Open a separate savings account
Opening a separate savings account for your down payment goals is the most convenient way of making sure the money will stay put. You can deposit a fixed amount of money automatically every month, add your tax refunds, work bonuses and more into the account. Many banks offer special savings accounts where you can lock the money until you use it.
The best account to open is a Tax-Free Savings Account (TFSA). Whatever you earn in that account through interest or investing, it will not be taxed, and you are free to withdraw from it whenever you want. The only catch is that there is a limit to how much you can contribute each year. To know your exact TFSA contribution room, check with Canada Revenue Agency.
2. Cut down your expenses
To save for a down payment, you have to review what comes and what comes out. If you spend a significant amount of income in trivial things, maybe it's time to find other alternatives, cut your spending or change your habits. It's all about priorities. Remember that there are differences between "wants" and "needs."
Spending too much money eating out? Cook at home.
Planning a nice vacation at the beach? Have a "staycation."
Shopping for new clothes? Stick with the ones you have.
Paying for cable and movies? Watch Netflix instead.
You can skip (or reduce) these "wants" for a year. A frugal lifestyle is worth it once you see how much money goes towards your down payment.
3. Don't go into consumer debt
Debt is a money-saving killer.
Do you have any credit card debt? Try to pay it off in time and in full. There is no reason to pay interest rates if you don't have to.
And if you are a lucky one with no debt, try to keep it that way. Your mortgage application will look better on file for the lender if you are in good standing with your credit and have no consumer debt.
4. Ask for gifts
You can always borrow from family and friends, but things can always get tricky when money is involved. To keep your money-saving plans free of any drama, be open to any gifts from your relatives. For holidays and birthdays, ask for a small contribution to the down payment fund.
5. Withdraw money from your RRSP
Your Registered Retirement Savings Plan (RRSP) can be used to buy a home. The government established the Home Buyers Plan (HBP) to help Canadians afford real estate. They allow you to take out up to $25,000 a year from your RRSP if you qualify for the program.
However, you need to read the fine print. The money you withdraw will have to be repaid within 15 years. If you fail to do this, the money withdrawn will be counted as income and taxed.
6. Start selling
Anything can sell online these days. If you have something valuable that you are not putting to good use, maybe taking a look at eBay or Kijiji can be a good source of money. If not, garage sales never go out of fashion.
7. Get a second gig
Taking a temporary side gig is a great way to make substantial contributions to your savings, especially if you can't cut down too much on your expenses. You can go for freelance work, ask for extra shifts at work, do some tutoring or babysitting. Anything to get you those additional savings. We all have talents that can make some extra cash, so take a look at your skills and put them to work.
8. Skip the car
Gas, maintenance and car insurance are expenses that can take a lot away from your down payment. If a car is not necessary for your daily commute, you can wait for a year and find cheaper ways of transportation. Use the public bus, get a bike, or walk if it is close enough to maximize your savings.
9. Get a raise
Getting some extra money at work is easier said than done. But when you get a raise at work, all that money can go into your separate savings account. If you have been working hard and proving yourself at your job, maybe you deserve a raise after all.
10. Change your living situation
Moving is a good strategy to save a significant portion of your income, but only if you rent is lower than before - or none at all. You can move back with your parents or find a cheaper apartment to rent. You could downsize from a one bedroom to a bachelor or rent out a more humble place to live with a roommate. In the end, it will only be temporary until you get the keys to your own home.
Try to commit yourself to a money-saving plan, and once you have enough money to pay for a down payment, it is time to search for a house.