Mortgage Blog

How to Save for a Down Payment

October 30, 2012 | Posted by: Laurie Anne Faulkner

What is a Down Payment?

A down payment is the money you put forward toward the price of a home – your cash outlay - this amount needs to be a minimum of 5% of the purchase price and your deposit will form part of these funds. Closing costs are in addition to your down payment.

Lenders and insurers require that your down payment be derived from non-borrowed resources.

Saving for a down payment is part of becoming a homeowner. Having a good plan in place well before buying is the best way to go about it. However there are other ways to do it. If you have been contributing to your RRSPs you can use up to $25,000 and not pay the withholding tax for 2 years. Then you will have 15 years to repay the borrowed funds without it affecting your taxable income.

You can also use a gift from a family member as a down payment. They will be required to sign a letter saying that it is a gift and is non-repayable. In many instances parents want to help their children buy a home and if they are financially capable they want to see their children enjoy the home while they are able to share the experience with them.

Inheritance is also a source of down payment that is eligible. Please note that you will be asked to confirm the funds from the inheritance so make sure you keep all the legal documents and also track how the funds came into your bank account.

You can also borrow the down payment provided that you have excellent credit and you earn enough to pay the mortgage and carry the additional loan or line of credit used for that down payment.

How Much do I need for a down payment?

As a first time home buyer, you can obtain a mortgage with as little as 5% of the purchase price plus closing costs ( between 0.5% and 2% depending on the purchase price).

How do I save for a down payment?

A down payment on a home is an investment in your future. In fact, it may be one of the biggest investments you’ll ever make. So what’s the best way to save?

Three tips to save a down payment:

1. Keep the money apart from your other savings. That way, you’ll be less likely to spend it.

2. Find a way to grow your money safely. You don’t want to wake up a month before you plan to buy your home and find you have lost money due to a drop in the stock market.

3. If you’re a first-time buyer, you might want to save for a down payment in a Registered Retirement Savings Plan (RRSP). Under the government’sHome Buyers’ Plan, you can take up to $25,000 for each purchaser from your RRSP for a down payment on your first home.You won’t pay any tax on the money as long as you pay it back over the next 15 years.

What are some safe places to invest while I save for a down payment?

• High-interest savings account

Every time you get paid, you can put some money into this account. When you’re ready to buy, you can easily get your savings out. For some people, that’s not a plus, however, because it’s a little too easy to take the money out and spend it on something else.

• Guaranteed Investment Certificate (GIC)

As your savings grow, you may want to buy GICs. If you think you’ll be tempted to spend some of your savings, you can lock your money in with a Short Term GIC so that you can’t easily get at it.

• Canada Savings Bond (CSB)

The federal government offers CSBs to investors at certain times each year. They pay minimum interest and you can invest as little as $100. One type of CSB is cashable any time. Certain provinces also offer provincial savings bonds.

• Money Market Fund

A money market fund is a mutual fund that invests in safe, short-term products. The fund is run by a professional investment manager who invests the money for you. You can get your money quickly and easily, usually within 24 hours. However, like other mutual funds, there are fees to pay for having your money in the fund. There may also be fees for taking your money out.

After fees, the average Canadian money market fund returned 2 per cent compounded yearly over the past three years. That number hovered around zero in 2010.

Remember: It takes time to save up a down payment.

Finally, it is also a good idea to get pre-approvedeven if you do not have your down payment yet as this can help you determine what amount you will actually need to purchase a home with including closing costs and whether you will need to pay off any other debts to qualify.

You can speed up the process if you invest your money so it will grow.

Just don’t take more risk than is comfortable for you.

Please call me if you have any questions 250-588-2288 – Laurie Anne Faulkner or apply on-line now

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