How to Save for a Down Payment When Purchasing A Home
If purchasing a home is one of your goals in the next few years, planning to save money for a down payment should be your top priority. In order to qualify for a mortgage in Canada, banks require a minimum of 5% of the sale price of a home. Depending on the price of the home you ultimately wish to purchase, this will necessitate accumulating a substantial sum of money.
Putting some thought into the amount you're willing to put down as a down payment is crucial; it will have a significant impact on the size of your mortgage payments. Naturally, a larger down payment will translate into smaller mortgage payments. Also, if you pay a down payment of 20% or more, you're not obligated to pay for mortgage default insurance, which can add anywhere from 1% to 3.5% of the principal amount.
Once you've calculated your ideal down payment amount, it's time to brainstorm some ways to save money to ensure you hit the target.
Cut Down on Expenses
One of the most sensible and efficient ways to save more money is to cut down on expenses. Jot down a list of your monthly expenses and scrutinize each item one by one - you might be surprised to learn where you can trim your budget.
Even seemingly minuscule purchases, such as your daily cup of coffee, can add up to $50 per month or more. Eating out at restaurants can also add up, as can the cost of cable, internet, and phone services.
To bring down your expenses, buy groceries in bulk, take advantage of coupons and sales, and eat more home-cooked meals. Also, consider negotiating with your Internet and phone service providers; now would be a good time to see if you can enter less costly plans. And with the plethora of streaming providers available today at a fraction of the cost, it could be worthwhile to simply get rid of cable altogether.
If you have substantial credit card debt, ensure you get it paid down as soon as possible, as credit cards normally charge the highest rate of interest. Or better yet, don't buy anything else on credit!
To save even more money, examine the possibility of moving back home with your parents, living with a roommate, or renting a smaller apartment.
While no one is saying you must subsist on canned tuna and wear rags for clothing, adopting a modestly frugal lifestyle will go a long way in helping you secure your target down payment amount.
Increase Your Income
If cutting down on expenses won't suffice, the next option is to increase your income. Acquiring a second job or starting a side gig are all great options if you're not too keen on altering your spending habits.
If you have a second bedroom, you might want to consider renting it out, which will create a passive income stream. And since you'll be moving into your new home in the near future, take some time to make an honest assessment of your personal belongings. If you're reasonably certain you won't take particular items with you when you move out, sell them and add the money to your down payment fund.
Start A Savings Account.
Opening a savings account is a great way to save money for a down payment. Avail yourself of resources such as Ratehub, which aggregate the rates offered by a variety of financial institutions. Select the plan that is most convenient for you and provides the highest rate of return.
Consider opening a Tax-Free Savings Account (TFSA). You can contribute up to $6,000 per year as of January 2019. This tax-advantaged investment vehicle is eligible to hold a wide variety of investment products, and any income earned is not subject to tax. Best of all, when you are ready to allocate the funds to your down payment, you are free to withdraw it from your TFSA without incurring any tax liability.
Take Advantage of Government Subsidies & Incentives
If you're buying a home for the first time, it's in your best interest to take advantage of the First Time Home Buyer’s Tax Credit (HBTC). This tax credit allows you to claim $5,000 of your down payment on your tax return. The credit amount is calculated as the lowest personal income tax rate for the year multiplied by $5000, which works out to a $750 credit.
Your Registered Retirement Savings Plan (RRSP) can be a great source of financing for your down payment. The Home Buyer’s Plan (HBP) allows you to borrow up to $25,000 from your RRSP, to be repaid within 15 years.
Though saving for a down payment can be a daunting task that will require some self-discipline and careful planning, the rewards and benefits of owning your own home will make the sacrifice worthwhile.