Buying a home is typically one of the biggest investments a person will make in their lifetime. It takes some motivation and a lot of financial planning to be able to afford a home. Currently in Canadian housing markets, a 5% down payment is required for lenders. This, however, may soon change as talks of increasing the down payment of a property to 10% by Finance Minister Jim Flaherty.
Saving money at the best of times can be hard, but it is crucial that setting money aside for a down payment is done. Even being slightly short of your required down payment may likely cost you a new home.
Here are 5 tips to take to start saving towards a down payment:
1. Invest! Invest!
When you can’t touch your money, it makes it a lot easier to save up. Banks are beginning to introduce “high-interest savings accounts” that offer moderate interest rates, with some strict regulations about withdrawing funds from that account. Having automatic deposits into this high-interest savings account can even allocate some money automatically, set according to your schedule. Getting paid bi-weekly? Automatically have $50 every two weeks deposited into that account. By the end of the year, you will have $1,200 – not including the interest you have accrued.
There are many different bond options that you can also choose to go with. Some are lockable, some are not – which may be an advantageous thing to have. Speak with a representative at your bank to see your options, as every financial institution offers different products and services.
2. RRSPs
RRSP – Registered Retirement Savings Plan – typically for when you retire. However, the Government of Canada has introduced a new program called the “Home Buyer’s Plan”. First time home buyers can use RRSPs for the purchase of their first home. An individual can withdraw up to $25,000 towards the purchase of a home. The money does have to be paid back in full within a 15 year window. If the entire amount withdrawn is paid back in that time, it is tax free!
Not a first time home buyer? It is still possible to deduct from your RRSP, as long as you do not exceed your ‘deduction limit’. The limit is a unique number for every individual, but can easily be found by looking on your most recent Notice of Assessment. The maximum deduction limit for 2010 is $22,000, however, some individuals may find their limits are higher (considering they have not touched their RRSPs in the last 20 years).
3. Did Someone Say PRESENTS?!
It would be nice to be able to get gifts of money, but this is not always available in every financial situation of each family. Having a family member give a gift of money is a popular and helpful way of reaching the down payment needed to purchase your home.
Typically, gifts of money are seen in newlyweds that are just starting off together. This of course is not always the case.
It is important to remember some limitations about gift letters and mortgage approvals: the gift must come from a direct relative (mother, brother, sister, etc) and must be deposited into your bank account for 3 months prior to the closing date of your home’s purchase. Failure to follow these rules may result in you loosing your mortgage approval. Lenders are strict on ensuring that the money you are receiving is actually a gift.
4. Consistent Work History
Qualifying for a mortgage is subject to meeting all the necessary criteria, including work history. Lenders look for stable and consistent job history, and individuals that make a sustainable income. Jumping from job to job looks risky to lenders, so avoid this maneuver whenever possible.
If you can’t seem to save up any money for a down payment, you’re not alone. About 60% of Canadians live pay check to pay check. You do, however, have a few options to explore. You can always search for another job with a better pay rate. It is recommended that you stay within the same field and have this job for some time before applying for a mortgage. Alternately, you can remind your employer of what a fantastic role you have in the company, and that you would like a wage increase to reflect that. Yes, both options are nerve wrecking – but sometimes it is necessary.
5. It’s Time to Save!
The easiest way to start saving money is to open a savings account with your bank. It’s a simple but effective step in helping you save towards a down payment. This does not necessarily have to be for a down payment, it can be extended to anything – money for a new car, new trip, etc. One tip is to rename the account “down payment” so you KNOW that’s where the money is going. It always helps to visualize where your money is going.
With the technology of online banking, it is extremely simple to have automatic deposits – therefore there’s very little thinking involved. At any time, you can adjust the frequency and payment going into the savings account. This is similar to the high-interest savings account outlined previously, although this account allows you more flexibility with regards to withdrawals.
The Government of Canada has introduced a new Tax Free Savings Account. This allows residents to put in approximately $5,000 per year. The money withdrawn is tax free, and unlike the Home Buyer’s Plan, does NOT have to be repaid. For more information, visit http://www.tfsa.gc.ca/index.html.
For more tips and tricks on how to save for a down payment, or any other related questions, speak with your accredited mortgage agent.
Parmida Modiri, AMP
Mortgage Agent
Lic. #: M08005765
www.signaturemortgage.ca
