Unique Ways to Save Up for a Down Payment in Canada
Buying a Home in Canada – Down Payment Requirements
Buying a home is exciting, but it’s a big commitment and it requires careful planning. Before you purchase a house, you need to come up with a downpayment. A down payment is a percentage of the sale price on the house you wish to buy, and it acts as a cushion against the loan payments and interest rates of your mortgage. The CMHC, or Canada Mortgage and Housing Corporation, recommends limiting a mortgage payment to approximately 30% of your total gross monthly income.1
In Canada, there’s no maximum amount you can pay for a down payment, however, there is a minimum, and this depends on the total price of the house you buy. For example, consumers hoping to purchase a home of $500,000 or less must pay a minimum of 5% as a down payment. For a property worth $300,000, this would mean spending $15,000. For homes in the range of $500,000 to $999,999, Canadians must spend 5% for the initial $500,000 and an additional 10% for the price beyond. This would mean paying $50,000 as a down payment on a home of $750,000. For houses priced at $1-million or more, 20% of the purchase price is required as a down payment.2These guidelines are based on a mortgage applicant with good financial standing and a clean credit history. For applicants with poor credit, payments above and beyond the minimum may be required.
Unless you’ve been saving your whole life for the down payment on your new house, this could put a serious damper on your home buying dreams. Fortunately, there are ways to save, even in todays economy. Here are 5 tips for house hunters looking to put away cash for a future down payment.
Tip 1:Become an Entrepreneur
Even with a great paying job, saving for a down payment sometimesfeels impossible. While balancing current rent payments, utility payments, groceries, gas, and extracurriculars, who has extra for savings? One way to beat the system is by creating a whole new stream of revenue specifically for your down payment. From dog walking and house-sitting to freelancing special skills online, you can funnel this secondary income into a savings account with your future home in mind.
Some Canadians use online classified website, such as Kijiji or Craig’s List to list a service, or search through online freelance sites like Upwork, Fiverr, or Onsite for jobs related to special skills. Writing, web design, coding, and even remote customer service work is abundant if you know where to look.
Tip 2: Setup Recurring Deposits
Nobody likes to take their hard-earned cash and send it off toward bills each month, and who can remember to take money out each pay for other expenses, like savings? By setting up a recurring deposit from your checking account to a saving account, you ensure that a) the money is coming out each pay for your down payment saving project, and b) you don’t notice it go.
Even sending as little as $50 every two weeks will land you with approximately $1,200 by the end of the year. This means that in 10-years you could have enough for a minimum down payment on a $250,000 mortgage. Make that $150 every 2-weeks and you’re looking at enough for a minimum deposit on a $350,000 home in less than 5-years. The amount you transfer each month is up to you, but not having to manually wire the money each pay certainly helps with the willpower factor.
Tip 3: Skip the Extras& Save Your Change
Canadians love coffee but buying a cup of Joe on the go will cost you $1.99 to $3.50, with specialty drinks ranging anywhere up to $6.00. Skipping 1 cup of even the cheap branded takeout coffee a day could save $10.00 or more per week if you choose to make your own instead.
To save for your down payment, create a change jar and drop in the money you would usually spend on coffee, donuts, vending machines and other on the go food and drink. You might be surprised to see how quickly the jar fills. When there’s no more room for change, deposit it into your savings account and start again.
Tip 4: Have a Pre-House Warming Party
When someone is expecting a baby there’s a baby shower and friends and family gather to give gifts and celebrate the Mom to be. When couples get engaged they have an engagement party and brides get a bridal shower. These are all celebrations that come before the main event, so, why can’t the commitment to buy a home be celebrated before the purchase of the house goes through?
Throw yourself a pre-housewarming party to celebrate your decision to buy. Invite friends and family to play games like, “Guess What Style of Home We Want”, or, “Pin the Door on The Duplex”. Instead of asking for gifts in your invite, recommend a donation toward your house fund, or sell tickets for a 50/50 draw, door prize, or raffle. It might not cover the entirety of a down payment, but every little bit helps.
Tip 5: Use a TSFA
A great way to store money for a down payment is with a tax-free savings account. These accounts allow you to put money away without being taxed on the funds you withdraw. TSFAs accumulate interest as they sit, but still, give you access to your money when you need it most, and unlike other accounts, they’re fee-free.
Most banks offer a TSFA option, and you can use online TSFA calculators to reach your short-term goals and see how much you’ll save in taxes each year. Just be sure to follow the guidelines provided by the bank to keep your account in good standing and stay tax-free.
Final Thoughts on Saving for a Down Payment in Canada
Once you have your down payment in hand, it’s important to work with a mortgage broker to garner the best rate and create a payment plan that works with your life. Canadian mortgage brokers have access to a variety of lenders and can offer you a selection of rates not available through a single bank or financing company. They also work primarily on commission, which means you don’t have to pay for their services, the lender does on your behalf.
Real estate dealings include plenty of fine print, unforeseen costs, and legal jargon. A mortgage broker will help you unravel the mystery of these documents and works for you rather than a bank during your mortgage dealings.
So, whether you choose to save in a TFSA, create your own revenue stream as a freelancer, or simply skip the takeout, remember to save with a plan and a broker in mind.
- Government of Canada (2018) Buying a home. Financial Consumer Agency of Canada. Retrieved on September 25, 2018 from https://www.canada.ca/en/financial-consumer-agency/services/buying-home.html
- Government of Canada (2018) How much you need for a down payment. Financial Consumer Agency of Canada. Retrieved on September 25, 2018 from https://www.canada.ca/en/financial-consumer-agency/services/mortgages/down-payment.html