The cost of a home may seem overwhelming, and saving for a down payment can be daunting if you are just starting out. But, with the proper planning, budgeting and saving you can be well on your way to owning your own home.
Below are some tips that will help you generate the down payment you'll need to purchase a home.
Determining your Down Payment
When your are thinking about your first new home, it’s imperative to find out how much you can afford to borrow. This is important because the cost of the home will affect the down payment you'll be required to pay.
A mortgage calculator is helpful to determine this. Remember that your monthly mortgage payments should not exceed 30% of your monthly income. Once you know what amount you estimate your want to spend with a mortgage principal in mind, you’ll need to decide the percentage of down payment and the length of the term based on what is feasible for you. Let’s break it down.
For example, assuming an average first-time buyer purchase price of $300,000 and a minimum 5% down payment, this means you would need to save at least $15,000 plus closing costs. Over a 4 or 5 year period, this means saving roughly $3000 to $3750 per year, which translate to about $250 to $310 a month. This can seem quite daunting, but there are many ways to make saving money easier.
Saving for your down payment
In addition to your budgeted savings, there are lots of small things you can do that could help you reach your goal sooner:
- Save your change:
If you put your spare change aside at the end of every day, it can really add up. - Bring your lunch:
By not spending $10 on lunch every day, you could save almost $1,000 a year. - Save by not buying a daily latte: A daily cup of coffee can translate to $45 to $100 per month.
- Try public transit: Commuting by mass transit can cut out a significant amount in gas and using the car less may translate into less repair costs over time.
- Bike to work: Even cheaper than taking the bus or train, riding your bike to work has the added benefit of keeping you fit as well.
- Reduce spending on entertainment: One a week out at a restaurant can cost you on average $60, which could equate to $2880 a year! Trying doing it once every 3 weeks. Taking the effort to buy groceries on special, and buying in bulk can also mean greater savings.
- Reduce your rental costs: If you are renting, it may be wise to move to a cheaper place or to take in a roommate, which will immediately cut rental costs.
- Do your taxes: Any refunds you receive can go straight into a savings fund.
Borrow from your RRSP
Another way to get to your down payment goal faster is by taking advantage of the federal government's Home Buyer's Plan (HBP).
This program allows you to withdraw up to $25,000 from your registered retirement savings plan to buy a home. And in fact, the federal government's 2019 budget proposes increasing this limit to $35,000.
The program provides you with 15 years to repay the money you've borrowed from your RRSP, with payments startinginn the second year after the year you withdraw the funds from your account. This will allow you to put more money towards the down payment on a home while still ensuring you can continue to invest in your retirement.
Bigger Down Payment, Smaller Monthly Payments
When it comes to mortgages, undoubtedly a larger down payment offers many benefits. Monthly principal and interest payments will be reduced, as well as overall interest paid in the amortization period. A conventional mortgage with 20% down payment will even save the purchaser from having to pay more for default insurance, which can be 1.00% to 3.50% of the principal amount. For those unable to put down 20%, there is always the option of a high-ratio mortgage with a down payment as little as 5%, but this will require the purchaser to allocate more of their monthly budget to mortgage payments.
Consider which steps above you could implement when saving for your down payment. With some careful planning, you'll be closer to realizing your dream of owning your own home faster than you think.
