One of the biggest barriers to homeownership for Canadians, especially for young and low-income Canadians, is the required home down payment. Without responsible saving practices, collecting the amount of money for the average down payment seems all but impossible.
However, that doesn't mean you can't do it—you just need the right strategy. It also doesn't mean you need to stop enjoying your life and save every hypothetical penny towards your down payment. In this guide, we will outline the best practices for saving for a down payment. We hope that this will help every Canadian achieve their dream of homeownership.
Why is a down payment important?
First of all, you will not get any sort of mortgage loan without at least some amount of down payment. The only realistic way to avoid a down payment is to forgo a mortgage and pay the purchase price upfront, and if you were able to do that, you wouldn't be reading this article.
Your down payment will affect the types of mortgage rates you can get. It will also determine if you need mortgage default insurance and how much it will cost. A larger down payment can also mean less interest paid, lower monthly payments, or a shorter amortization period because you only need to pay interest on the actual amount of your loan.
Should I save more than the minimum down payment?
Generally, the larger the down payment, the better. This is because the amount of your payment affects how favourable your mortgage is. However, there is no reason to spend your whole life saving for a 90% down payment.
You need to consider a few options like where you want to purchase and how much of a down payment you want to pay. You will need a minimum down payment of 5% on any home purchase, but down payments lower than 20% will also be required to buy mortgage loan insurance, so make sure to weigh your options. Mortgage insurance can cost up to 4% of your mortgage price, so something like 5% down ends up being more than 5%.
Once you know the average purchase price for the area and how much you want to put down, this number will be your target. Keep in mind: while you are saving, prices may change, and that additional costs may eat into your down payment. It is good to aim a bit above the minimum amount you think you need.
How to save money effectively
Sadly, many people were never taught how to save money. As a result, they end up wasting their time—and money—before they begin saving.
One of the most simple saving tips is to save money as soon as possible and as much as possible. But, that doesn't necessarily mean you should start saving right away.
Before you save
In a best-case scenario, your down payment fund is kept separate from your daily expenses. That means you need to avoid the temptation to dip into your savings account when you find yourself tight on cash.
The conventional advice is to pay down any outstanding debts such as student loans or credit card debt and accrue a decently sized emergency fund, typically a few months' expenses, before you start saving in earnest.
Not only will this put you in a better financial position and shelter you from financial hiccups, but it will also protect your savings from yourself. Also, consider the impacts of poor credit history on mortgage rates, and consider improving your score along with your saving plan.
Finally, becoming skilled at managing your money and saving regularly will help you when it comes time to make your monthly mortgage payments.
Take advantage of a high-interest savings account or registered retirement savings plan (RRSP)
Once you are ready to save, starting with a goal in mind can help you stay motivated and create realistic strategies. It's also worth talking to your bank about a place to keep your savings. Options like a high-interest savings account, Registered Retirement savings plans, and TFSAs are financial tools you should be taking advantage of, rather than storing all your savings in a shoebox.
Cut out expenses
Saving isn't something that happens all at once. You will be surprised at how much money you can save in the long term by cutting out unnecessary expenses now. It's okay to treat yourself on occasion, but those regular small treats can add up.
Don't just rely on intuition – track your results
Spend a month tracking every cent that you spend, then look at your results. Chances are, you will find a lot of little savings here and there that can help you save hundreds or thousands a year.
A good budgeting app can help you keep track of your expenses automatically. A budgeting app can be especially helpful if it is linked to your bank account.
Cutting down on bigger expenses
You can save on bigger expenses (i.e., rent or car payments) by opting for less expensive options. They may not be the most glamourous or comfortable choices now, but your future self will thank you.
Save large sums wherever possible
It may be tempting to spend without consequence if you have been gifted a significant amount of money, received large tax refunds, or a bonus at work. Rather than spending, you should seriously consider putting all or at least some of this money into your savings right away. While saving small increments over time will help you save in the long term, large deposits can help you get where you need to be much faster.
Explore other sources of income
Obviously, most people would choose to increase their income rather than explore other sources. Unfortunately, what you make isn't always your choice, but there are some ways you can bring in more cash.
If you think need to make substantially more money to afford a down payment, consider a job change or acquiring additional training or certifications.
If you want to stay in your current job, you can also consider a second job or side hustle. Many people try to monetize their hobbies, take on gig work, or freelance work outside of their day jobs. While an additional job can add extra stress, the ability to be your own boss may make it moderately more enjoyable.
Invest your money
Investing is the secret to financial success. It’s no wonder why some of the world's richest people are also some of its largest investors. As a result, more people are investing to grow their wealth. That’s why more homes are being sold to real estate investors rather than people looking for a place to live.
Your eventual home is an investment for yourself, so it wouldn't hurt to learn a bit about investing now with smaller amounts.
There are various options available for investing. Some investment products are stocks, bonds, REITs, mutual funds, and more. Every potential investment has its own risk-reward ratio, and you should consider how much risk you are able to take on before investing. It is also good to consider how soon you would like to cash out on your investment.
Investing can be rewarding, but complicated. Be sure to do some research before you go all in.
Use assistance programs and first-time buyer incentives
If you are a first-time homebuyer, there are numerous programs that you can take advantage of to ease your difficulty in funding your down payment. While these options usually come with terms, it is still a good idea to take advantage of their savings. After all, they exist to help you!
First-Time Home Buyers Incentive
The First-Time Home Buyers Incentive program will allow you to get 5 or 10% of a down payment from the government, to be paid back over 25 years or when you sell your home.
The First-Time Home Buyers Incentive is a shared equity mortgage, meaning the government has a stake in your home. You have to pay back the same 5% or 10% you borrowed from the government. But, if the value of your house goes up, so does the amount you have to pay.
Home Buyers' Amount
This program offers eligible Canadians a $5000 non-refundable income tax credit for the year of your home purchase, saving you up to $750 in federal taxes.
Home Buyers' Plan (HBP)
The HBP allows you to withdraw up to $35,000 from your RRSP, tax-free, to put towards your down payment. Each partner can withdraw $35,000, providing you $70,000 for your down payment. While this can be helpful, it's not free money.
Not only will you be required to pay back the amount borrowed, but you will also be borrowing against your retirement fund. Furthermore, you will need money in your RRSP to advantage of this option. Check with your municipality on incentives for first-time homebuyers as there may be additional programs available in your area!
Put your saving skills to work
If you follow these tips, you will be on track to saving for your down payment. And, if you keep yourself in the saving mindset, you may even find additional ways to save money beyond what we covered here. Even after you've made your down payment, the fun doesn't stop there. Being smart with your money is a crucial skill that will help with keeping up with mortgage payments. Good luck!