A down payment is generally required when seeking a mortgage and can cost a hefty price depending on your home value. To help ensure you’ve got enough when you apply for a mortgage, you’ll need to start saving early on.
Read on to find out how to budget for a down payment.
What Is a Down Payment?
Down payments refer to an upfront sum of money issued towards the purchase of a home. The exact amount depends on the price of the home, the type of mortgage, the lender, and the buyer’s financial and credit profile.
How Much Does A Down Payment Cost?
Down payment requirements in Canada are as follows:
|Home Price||Minimum Down Payment Required|
|Up to $500,000||5%|
|$500,000 – $999,999||5% on the first $500,000; 10% on the remainder|
Should You Save for Mortgage Default Insurance as Well?
If you make a down payment of less than 20% of the purchase price of the home, you’ll need to pay mortgage default insurance. We recommend taking the time to save up and consider all associated costs.
How to Budget for a Down Payment
To budget for a down payment, there are certain actions you can take to help you keep more money in your pocket:
Save and Invest Your Money
High-Interest Savings Accounts – Rather than saving your money in a regular savings account, take advantage of a high-interest savings account. These accounts come with rates as high as 1.5% + and are typically offered by digital banks.
TFSAs And ETFs – Tax-free savings accounts (TFSAs) are registered investment accounts that let you grow and withdraw your funds. Exchange-traded funds (ETFs) trade on stock exchanges and track a specific index. Similar to stocks, you can buy and sell with less risk and exposure.
Budget And Automate Savings
● Establish A Budgeting Plan. Create a budget for your financial situation by cutting costs and setting aside an amount for your needs.
● Set Up Automatic Savings. Have your bank accounts set up for automated savings so you don’t have to make the transfer yourself.
Are There Government Programs to Help With Making a Down Payment?
Home accessibility is an issue in many Canadian cities. Luckily, the governments have developed various programs to help Canadians finance their dream home:
● Home Buyers Plan (HBP). This tax-free program allows you to borrow up to $35,000 from your RRSP account for a down payment.
● First-Time Buyer Tax Credit. This $5,000 non-refundable tax credit is designed to help you recover closing costs associated with buying a home.
● First Time Homebuyer Incentive – Have 10% of your home costs covered by the government in a shared equity loan.
● Tax Free First Home Savings Account – Combines features of RRSP and TFSA, allowing young Canadians to set aside every dollar they earn up to $40,000 and shorten the time it takes to afford a down payment.
It’s never too early to start saving for a down payment. The more you can save, the less you need to borrow.