January 2, 2017
How to Save for a Down Payment Under the New Mortgage Rules
Pulling together the funds for a down payment on a home will be one of the biggest things you ever save for. And with new mortgage rules now in effect in Canada, it’ll be even more difficult for buyers who can’t pay more than 20% down on their homes to come up with the cash.
Here are some pointers for coming up with the amount you need, despite new mortgage saving challenges.
Come Up With a Goal
Before setting your savings goal, you need to know the amount you’ll need to afford a home – you can’t begin your home search without knowing this number. Start off with a bit of research, and find a neighbourhood that suits your needs and wants.
When you know the prices of homes in your desired area, you’ll have a better idea of how much you have to save. A mortgage affordability calculator will help you estimate your maximum purchase price.
Save For the Stress Test
Under the new rules implemented in October, buyers paying less than 20% down on their home purchase will need to qualify for a mortgage at the Bank of Canada’s posted rate (currently 4.64%), even though the best five-year fixed rate mortgage in Ontario is less than half that rate.
This means your affordability will decline by more than 20% if you’re a high ratio borrower. It’s important to calculate the BoC posted rate into your goal, as your savings and financials will need to be high enough to qualify.
Once you know the amount you can afford, you can figure out how much you have to save every week, month, or year.
Look For Additional Down Payment Sources
There are also other sources you may have overlooked for when saving for a down payment. You can break them down into lump-sum and monthly contributions.
Lump-sum contributions can come from a range of different sources such as:
- Your parents
- Income tax refunds
- Your savings
- Selling assets (investments or a car)
These contributions can get you closer to your down payment amount and cut your savings timeline.
After you’ve drained these sources, it’s time to look at ways to increase your monthly savings. You can do this by trimming your expenses. Moving to a cheaper place or moving back in with your parents may not be ideal but it can save you a lot of money. Cutting your cable, eating out less, or giving up a second car are other options. The money you save can go towards your down payment fund. The budget cuts you make can be as small or as aggressive as you like. But the more you save, the closer you can become a homeowner.
Monitor Your Progress
When you set a savings target, keeping track of your progress can help you reach your goal. A spreadsheet is an easy way to monitor how close you are to your objective and can provide you with a forecast of how future contributions will get you closer to where you want to be. It can even motivate you to save even more.
You can create your own spreadsheet or choose from one online. If there isn’t one that’s perfect, you can always customize it for your specific goals. To keep yourself motivated, reward yourself if you reach a monthly target ahead of schedule.
Creating a goal is easy – reaching it is the hard part, especially if it could take a couple years to realizebyour savings target. Ensure your credit is good and you don’t max out your credit cards. To qualify for the best mortgage rates, having a high credit score will help and also save you money over the long run.
A larger down payment will reduce the amount you need to pay on your mortgage every month and also reduce your interest costs. Knowing how much money they’ll save can motivate some people to set aside more money at a faster pace.
The Bottom Line
The amount you’ll need to save for a down payment may seem intimidating. But by using the tips above, you’ll be able to shorten the amount of time you need to save and become a homeowner much more quickly.