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Saving up for a down payment can feel overwhelming when you are looking to purchase a home. Whether it’s finding the perfect floorplan that fits your lifestyle or selecting the beautiful finishes of your home to best compliment your style, becoming a homeowner is not only rewarding but an exciting time. We broke down 5 tips that can help you save up for a down payment and take homeownership from a dream to a reality.

Down Payment:

A down payment is often critical to getting approved for a mortgage in Canada. The lump sum of money you put down on your home, will be deducted from your purchase price, leaving your mortgage loan to cover the balance remaining.

How to calculate your minimum down payment:

For home purchases under $500,000, the banks will require a minimum down payment of 5%. For purchases between $500,000-$1,000,000, the banks will require a down payment of 5% for the first $500,000, with an additional 10% due for the remainder. If your purchase price exceeds $1,000,000 you are obligated to have a minimum down payment of 20% of the entire purchase price.

For example, if the cost of your home is $600,000 you can calculate your minimum down payment by adding two amounts. The first 5% due of the first $500,000 is equal to $25,000. The second amount is the 10% due of the remaining balance of $100,000, equaling an additional $10,000. The total down payment due on a $600,000 purchase would equal $35,000.

Keep in mind that if your down payment is less than 20% of the mortgage value, you will be required to purchase CMHC insurance which will incur additional costs. Speak to a licensed mortgage broker in your area to learn more.

5 Tips for Saving for a Down Payment in Canada:

1. Prioritize your financial and life goals by saving smart

There are many expenses in life and saving for a down payment is not always easy. Through hard decision making when it comes to budgeting you will want to avoid purchases that you want versus what you need. Cutting out expenses such as vacations, eating out at restaurants and limiting your clothing and grocery expenses where you can, may be the best place to start. By prioritizing saving money, this will motivate you to look for ways to limit your spending helping you save for your down payment. Put together a savings plan and stick to your goals.

2. Pay off debts

A mortgage is a big commitment so you will want to try and eliminate any other debts before taking this on. Debts, such as credit card debt can not only affect your loan amount but paying monthly interest fees can create a challenge when trying to save. In addition to improving your credit score it can also qualify you for a more competitive rate on your mortgage. Banks will assess your debt-to-income ratio when determining what you qualify for, so it’s important to keep your debts low and manageable.

3. Maintain a good credit score

A good credit score is the key to success if you want to quality for a mortgage at a good rate. It’s as simple as paying your bills on time, not exceeding your credit card limit, and by staying on top of any suspicious charges on your cards and/or bank accounts. By building up your credit history by using credit cards ensuring you pay it off and paying back loans such as tuition or a car, lets lenders know you are good to honor your payments and pay off your debts.

4. First time homebuyer? Withdraw from your RRSP or participate in the Home Buyer Incentive Program

If you’re a first-time homebuyer in Canada, you have a couple options that can help you reduce your mortgage payments or boost your down payment. 

Registered Retirement Savings Plan (RRSP)

In Canada you can borrow up to $35,000 CAD tax-free from your RRSP to put towards your first home in Canada. Keep in mind that if you and your partner are both first-time home buyers, you can both borrow from your RRSP resulting in a total of $70,000 CAD for your down payment. You are obligated to pay back the loan within 15 years to avoid any penalties, but it provides a great alternative for those needing to secure a down payment. Tip: The funds must be within the account for greater than 90 days to be tax free. If you withdraw anything within the 90-day period, you will be taxed.

First-Time Home Buyer Incentive Program

The Government of Canada introduced the First-Time Home Buyer Incentive Program to help reduce your monthly mortgage payments. The incentive offers five to ten percent of the total purchase cost of a newly constructed home. The amount will be added to your down payment resulting in a lower mortgage and monthly payments. You are obligated to repay the incentive within 25 years or when the property is sold, whichever happens first. This program is considered shared equity which means that the government shares in both the upside and downside of market changes, up to a maximum gain/loss of 8% per annum (not compounded). This means, the amount to be paid back is based on the percentage that was borrowed and may fluctuate if your house appreciates or depreciates in value.

For example, if the purchase price of your home is $500,000 and you borrowed 5% ($25,000), when you go to sell the home and the house sells for $600,000 you would be obligated to pay back 5% of the current value or $30,000, not the dollar value which was borrowed.

Tax-Free First Home Savings Account
A new incentive the federal government will be implementing in 2023 is the Tax-Free First Home Savings Account for Canadians under 40. Those who are eligible can save up to $40,000 within this account, which can be used towards the purchase of your first home with no obligations to pay it back. You can deposit up to $8,000 annually, to a total of $40,000. To qualify, the following criteria must be met:

  • Must be 18 years old and under 40
  • Be a Canadian citizen or permanent resident
  • Can’t own a home during the previous 4 calendar years or in the year you open the account

5. Isolate your “Savings” fund

To ensure your funds, remain untouched, have a specific spot such as savings account or a secondary bank account. This allows you to isolate your funds for your down payment while avoiding unnecessary dipping into that account. It’s easy to forget the commitment to not spend the money, so if you can set up a designated place where those funds can’t be used is a great trick. This also allows you to monitor your daily spending and help you target those problem areas to improve your spending, while cutting unnecessary costs and staying on track with your budget.

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