How to save for a down payment faster
In Canada, you need a minimum of 5% as a down payment when you purchase a home under $500,000. That means that on a home costing $500,000, you’d need at least $25,000 down.
But between paying for rent and the cost of living, it can feel extremely difficult to save up that much money.
Here are some steps you can take to help you save for a down payment faster.
First, consider your spending
Do you know where every dollar of your income goes? Probably not. Few people do. But if you want to save up for a down payment as quickly as possible, you will need to know where each cent goes.
Track your spending for a month or longer and see what patterns you discover. You might be surprised to find out that you spend way more on eating out or entertainment than you thought.
Pay off your credit cards
Before you can truly save for a down payment, you need to clear off any credit card debt. There’s no point saving up for a house while some of your hard-earned money is going towards interest.
Besides, you may not be approved for a mortgage if you have a lot of debt so it’s wise to get this out of the way before you change focus and start saving for your home.
Create a budget that focuses on saving
After tracking your spending for a while, you’ll be able to build a budget that puts as much funds into savings as possible.
If buying a home is your top goal, you will have to sacrifice some of your wants to get you there.
Figuring out how much to save and trying to determine how long it will take is tricky. But without knowing this information it’s a lot harder to be motivated to reach your goal.
One of the best ways to break your budget into realistic steps is to calculate how much of your spending you can cut down on. Maybe you decide that you will stop eating out for lunch and pack a lunch instead. Or you cancel your gym membership and decide to take up jogging instead.
Add up how much less money you will spend each week and put all those funds towards your saving goals.
Where to put your money
Save your down payment funds in a dedicated savings account. Not the account you use for an emergency fund and definitely not your chequing account. Ideally, you will want a high-interest savings account or a tax-free savings account so that your money grows faster.
Set up automatic transfers that will move your money into the savings account as soon as you get paid. Choose a savings account that isn’t linked to your debit card. The harder it is to spend your savings, the sooner you will reach your goal.
There are other options for where to save your money besides savings accounts such as GICs, Canada Savings Bonds and money markets. Just be sure that you choose one that allows you to access your money at any time.
Research first time home buyer programs
The government has initiated a few programs to make it easier for first-time homebuyers to buy a home.
There’s a brand-new program called the First Time Home Buyer Incentive. This program will give first-time buyers an interest-free loan of 5-10% of the purchase price of their home.
In order to be eligible, you need to earn less than $120,000 a year and have at least 5% down payment. This initiative could make a significant difference in a person’s monthly mortgage payment.
Each year, you have the option to withdraw up to $25,000 (tax free) from an RRSP to use as a down payment. The catch is that you will have to repay this amount over the next 15 years.
You can also get the First-time Home Buyer’s Tax Credit. This non-refundable credit valued at $750 helps offset some of the closing costs of purchasing a home.
Saving up for a down payment takes dedication and sacrifice. And it does take time. But by cutting spending, calculating how much you can save and putting that money in the right account, you will move away from trying to save for a down payment to actually saving for a down payment.
What are you doing to get you closer to buying a home? Let us know in the comments.