June 7, 2012

Faster ways to save for a down payment

You’re ready to take the next big life step and want to buy a home. But how much money do you really need for a down payment? 5 per cent is the minimum down payment one can make – however, mortgage insurance is required if you make less than a 20 per cent payment. Wow – that means even if you want a $350,000 downtown bachelor condo, you’re looking at a lump sum of $70,000. The sooner you start employing some smart saving strategies combined with a well-laid out plan, the faster you will reach your goal.

Here are some ways to help you start saving:

Pay yourself first! The easiest way to save is to forget about it – by setting up monthly transfers to a separate savings account that is specifically for your down payment. Once you have determined the goal target and how much you can painlessly set aside each month, set up an automatic transfer into that account. Get paid bi-weekly? Line automatic transactions with your pay day to make saving fast and easy.

Take advantage of the being a first-time buyer: Did you know that as a first-time home buyer, you are eligible for the Home Buyer ’s plan? What this means is that you can use RRSP savings for a down payment; up to $25,000 or $50,000 per couple. After two years from the date of the withdrawal, you need to pay a portion of that amount by the end of the year – 0.667% – or else that amount is added to your taxable income for the year.

Find creative ways to save: Couples who are planning to buy together have an advantage when it comes to saving up for a down payment. Singleton? Why not create your own advantage; get a roommate to save on rent or consider buying into a place with friends or family? Younger singles buying together is a growing trend – just make sure all of the legalities and risks are outlined clearly. Love buying items on sale? Why not put the amount you have “saved” (ie: the 20% savings amount of the sweater you bought) in your down payment account each time you make a purchase on sale?

Don’t forget about accruing interest: When you are opening a savings account, the financial adviser at your bank will sit down and do a risk assessment with you. For short-time goals, such as buying a house in 5 years, you may be advised to put the money in a safe/low risk money market fund, guaranteed investments (GICs), Canada Savings Bonds, or TFSA (which allows a maximum contribution of $5000 per year). The interest accrued is lower but so is the risk. However, if you don’t plan on buying until further down the road, consider investing in higher risk index funds (a diverse mix of investments) as an RRSP for a higher payout and a tax refund; as a first-time home buyer you can withdraw that money penalty-free towards a down payment and have 15 years to pay it back. And why not invest that tax refund back into your down payment savings too?

Get in the game sooner: Maybe you desperately need more space for a growing family or have weighed the costs of having to wait 5 years to save 20 per cent down versus getting into the market now. You can make a lower down payment, with 5% being the minimum. It may even be possible to obtain a portion the 5% down through a line of credit or personal loan. Crunch the numbers and don’t forget to factor in mandatory mortgage loan insurance (sorry, it’s for protecting the lender if you can’t make your payments ), which is about 1 to 3.25% of the loan amount and either paid upfront or added to the principal balance. Note that with CMHC mortgage insurance, you may be eligible for a small refund if the home you are buying is qualified as being energy efficient.