If you’re considering buying a home for the first time in Canada, then you will have to consider the costs to obtain a home, the largest of which is your down payment. Saving for your first down payment is a significant hurdle in owning your first home. Whilst there are many different ways you can go about obtaining the monies to put towards your first down payment, the question still remains – what is the best way to save money for your first down payment?
7 Steps for Saving for Your Down Payment
In this article, we will look at seven sturdy steps which will help you to achieve your goal of saving for your first down payment for your first home in Canada.
Putting a 20% down payment on a home is considered to be the ideal amount in Canada. There are many reasons why people believe this is the ideal figure to aim for, not least is that you will avoid extra costs/mortgage insurance fees. However for most first time home buyers 20% is not attainable so 5% is the norm. Mortgage insurance providers such as CMHC have made home ownership possible with 5% down, but you do have an extra insurance cost added to your mortgage. Once you have decided on a down payment amount you need to also factor for another 2% (approximately) for legal fees and closing costs. This should cover the bulk of the costs to get into a home. Now that you have a number to budget for you should figure out a timeline for when you would like to purchase. You can now break this down into a monthly amount and focus activities and efforts towards achieving that figure. Having a clear goal is the first big step towards saving for your first down payment.
Open A Dedicated Savings Account/TFSA
Having a dedicated savings account purely for your down payment is the best way to keep track of your savings and keep focused on the goal! If you get a pay raise, bonus, a rebate, or some extra cash – placing it into this account will help you to reach your goal quicker. We recommend opening this account with a financial planner or the same institution you have your other accounts with, this will make it much easier to move money from your main account into your savings account. Pay yourself first is an old saying that holds true when saving for your first down payment.
Pay Off Any Other Debts
If you are paying additional interest on loans, or credit cards, it makes it harder to save for your down payment. Therefore, paying off any debts is a must. Look at which debts you have that carry the highest interest charges and ensure they are taken care of. By paying off these high interest bearing debts, you will have more funds to save for your down payment. Reducing your debt will also help when qualifying for your mortgage application too!
Tighten Your Belt and Spend Less
If you buy books – try using the library or the Internet. If you eat out once a week, change that to eating out once per month. Do you like to go out to see a movie, do you spend extra money on travel and refreshments whilst your there too? Do you like to get a coffee each day from your local coffee shop? Look for online alternatives and save the money instead. Do you like to treat yourself to new clothes each week or month? Realizing where your money is going will help you to put some changes and stop unnecessary expenses which will help you save. A great way to do this it to keep hold of every receipt you get for an entire month. Add this into a spreadsheet, and then categorize the sheet to see where everything is going. It’s a good wake up call to realize where you can stop wasting and save more!
Plan and Budget
Following on quite aptly from the point made above, step five is about managing your money. A spreadsheet is a great way to do this, however a paper equivalent is also ok if you prefer to do it that way. This should detail your income and expenditure, what you get in VS what you pay out. This will help you establish exactly how much money you can put into your savings account on a monthly basis to help you in saving for your first down payment for your new home.
Downgrade Your Current Vehicle
If you drive a car, it is easy to forget just how much it costs to keep this on the road. There is tax, insurance, fuel and the ongoing maintenance costs. If you have two cars in your household, ask yourself is this really necessary – could you get by, for maybe just a year with one? Can you
Downgrade to a different model which might cost less to run and maintain? Also, selling your car and buying a lower value vehicle could add a real chunk to your pot too!
Check and Negotiate Interest Rates
Regardless of whether you have a loan, credit card, catalogue or even finance on a vehicle – interest rates will differ greatly between each of the above. Check how much interest you are paying for each of your outstanding debts. Sometimes, all it takes is a simple call – as long as you have not defaulted and are up to date on your payments, you could get a lower rate of interest, simply by asking. You can also check with them if they have any low-interest offers, such as 0% on balance transfers to your credit card, and potentially save money on interest, just from transferring you’re balancing around.
We understand that moving from paying rent, to paying a mortgage can be a challenge. If you can put these seven basic steps into place to help you get your first down payment together, you will also find that these same principles can be applied to saving goals that you may wish to set for other important milestones, such as vacations, home improvements or cars in the future too. You will be on your way to saving for your first home and ready to take on the costs of home ownership.
These seven steps should get you on your way to saving for your down payment. Don’t feel bad if you can’t do everything we suggest. Use the ideas if you can. It’s a process and something that required time and patience to learn. Work with one of our trained Mortgage advisors on these and other ways to get started saving!