On May 1, 2014, CMHC made the announcement that premiums for default insurance would go up by an average of 15 per cent. While existing mortgages will not be affected, new home buyers that can’t afford a down-payment of at least 20 per cent will now face new implications, and therefore, need to make sure they’re prepared.
Saving towards a substantial down payment has become more important than ever – and all the more difficult. Considering the national average purchase price for first-time home buyers in Canada is a staggering $316,100, a down payment of 20 per cent would mean saving $63,220. Now, before your jaw hits the floor, there’s a silver lining.
This new increase can be financed over the life of your mortgage and CMHC has estimated that for the average home buyer who requires financing, the new rates will only add $5 a month to their bill.
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However, every new home buyer can attest that every dollar counts, so being prepared to save will not only allow you to avoid this increase but also reap the benefits of a number of other advantages. Below, we’ve broken down what a bigger down payment will mean for you, and how you can get there.
Why it’s important to save, save, save
Monetary perks: Typically, having a larger down payment shows greater financial stability. This is obviously preferable to mortgage insurance lenders, so it means you’ll get a better mortgage rate. Having a larger sum to put towards the purchase price of the home also means big savings on monthly bills and default insurance premiums. You may also be eligible to lock in a low fixed mortgage rate for up to 10 years.
More bang for your buck: The more you put down, the more home you can afford on the same income. With a pre-approved mortgage of $215,000 and a down payment of $30,000, you will be able to afford a $245,000 home, which could mean the difference between a fully updated home and one that requires a little TLC.
You’re not alone: Take advantage of the RRSP Home Buyer’s Plan. You may be able to withdraw (tax-free!) up to $25,000 for a down payment on your home. Generally, you will need to repay this amount within 15 years, but this can easily be done through the RRSP contributions you have already committed to.
Security blanket: Nobody wants to owe more than their home is worth, which could happen if the price of your home suddenly drops due to a market shift. A larger down payment will afford you a bigger equity buffer in case this happens.
Other things to consider
A down payment is not the only cost you’ll incur when buying a home. Here are some further financial considerations for you to make in the process:
Closing costs: Mandatory closing costs for the home buyer include land transfer tax, legal fees and disbursements, title insurance and PST on mortgage insurance. You may also be required to pay septic tank and water tests and Estoppel certificate fees. Closing costs are expensive and you can expect to spend 1.5 to 4 per cent of the purchase price.
Remember: you will also need to budget for property taxes and insurance and utility bills.
Emergency fund: Let’s face it. Unexpected expenses happen. Be prepared by budgeting 3-5 per cent of the value of your home for upkeep every year so you’re not caught off guard if you discover a leak or your shingles start falling off.
Furniture/Appliances: If you’re buying an unfurnished home that doesn’t come with appliances, be prepared to spend a pretty penny. You will also need to budget for having your locks re-keyed.
Future earning power: Your economic stability depends on the job you’re in and the security it provides. Are you a contract or permanent employee? Is there a glass ceiling or room for advancement? These are all things to consider when purchasing a home.
Tips for saving
- Cut frivolous spending
- Commit to one annual donation
- Get rid of one car
- Pack your lunches
- Postpone a vacation
- Cancel the gym membership you never use
Every little bit you manage to save will make your home buying experience that much better. With Zoocasa’s Complete Home Buyer’s Guide, we can help you answer the questions that are sure to come at every step in the home buying process.
Let us know what you think of the mortgage premiums increase in the comments below. Are there any cost saving tips that we missed on our list? Let us know in the comments.
