Ask any homeowner and they will tell you that purchasing a house is one of the most exciting, but stressful, moments in their life! It’s an exciting chapter that most people look forward to. However, for many people, this feat seems unattainable or near impossible to accomplish in this economy. Many young adults are still living in their parent’s homes, struggling to find ways to save money. There is no doubt that with these rising prices, it can be intimidating to make your first down payment on a home. However, with the correct planning, time, and dedication, we believe you can make your dream of being a homeowner come true. Luckily for you, isure has everything you need to know when it comes to tips on how to save for your down payment on your first home.
What is a down payment?
In order to reach your goal of saving up for your first down payment, you must first understand what it is. A down payment is a lump sum of money that you put towards a larger purchase in order to cover a portion of its price. In this case, the larger purchase is a home. A down payment must be paid up front using cash or a cheque. You cannot typically use a credit card to make a down payment. After you have paid this lump sum, your lender will deduct the amount you have paid from the total price of the home. From there, they will issue a mortgage containing the remaining amount. You will then make monthly payments towards your mortgage until your house is paid off in-full. In most cases, a down payment is critical in order to get approval for a mortgage in Canada.
What are the stats around home ownership today?
According to Stats Canada, the number of homeowners in Canada decreased by 2.5% between 2011 and 2021. In major cities, such as Toronto, roughly 47% of young adults between the ages 20 and 34 are still living with their parents. However, this decrease is happening all over Ontario. Cities, like Oshawa, show 49%, Windsor at 45% and Hamilton with 44% of young adults still living at home. In 2011, 1.4% of young adults in Ontario owned their own homes. These statistics were generally due to the rising prices of homes within the province.
How much is an average down payment?
The amount of money you need to put for a down payment will differ depending on the purchase price of your home. You may choose to put down more, but there are minimum requirements that must be met. The following is the minimum down payment requirement, depending on your home’s price:
- $500,000 or less: 5% of the purchase price
- $500,000 to $999,999: 5% of the first $500,000 of the purchase price, as well as 10% for the portion of the price above $500,000
- $1 million or more: 20% of the purchase price
Something to keep in mind is that if you are self-employed, a freelancer or have a poor credit history, your lender may require you to pay a larger down payment. This is simply to prove you will be able to make the mortgage payments when required.
Tips on how to save for your first down payment
1. Set aside money
Setting aside extra money can seem like a difficult task. However, it can be done, depending on your situation. Setting aside a small amount of each pay cheque you get from work can easily add up over time. Even if it is a small amount, such as $100 or $200. Government cheques, such as GST or tax returns are also a great way to receive a bit of income. Instead of spending these instantly when you receive them, try putting them away towards your first down payment. These examples are considered “found money” that isn’t earned strictly through a means of work. Simply pretend you never received it in the first place!
Additionally, when you are setting aside money, make sure it is in a place that isn’t easily accessible. This can be a tax-free savings account or in another place altogether. By doing this, you avoid any hesitation to dip into it on a night out or when you get tempted by that new pair of shoes you want to buy.
2. Reduce your spending to save for your down payment
This one might seem obvious, but you’d be surprised the difference it can make. Similar to the first tip, reducing your spending can be tricky and can be a hard habit to break. Generally, people will have to make some slight adjustments to their routine or hobbies. Are there any streaming services that you no longer use? Can you cancel the gym membership and work out from home? Even small changes, such as making coffee at home instead of buying one every day, can save you hundreds in the long run. The money you save from opting out of an expensive dinner can all be put towards your first down payment on a home. It can be a tough adjustment at first, but website and applications like You Need A Budget can help you figure out what you can (and can’t) live without.
3. The bank of Mom and Dad
We understand that asking for help from your parents can sometimes be tough. However, if you are fortunate enough to have family that can help with a down payment, you should consider it. It’s no secret that this is the route that many people tend to take. In fact, about one third of homeowners in Canada have received help from their parents when it comes time to making that down payment.
This does not only include first-time home owners, either. About 10% of people purchasing their second home also turn to their parents for assistance. Let’s face it, with the rising prices of properties, making a down payment by oneself can be tricky. If you are unable to save money due to a living situation, this can be an option for you. You can also have peace of mind knowing you can pay it back little by little, with no interest (if you’re lucky!)
4. Pay off your debts
Unfortunately, it can be difficult to save money when you are paying interest to someone else. Credit card debt, student loans, car payments and other forms of debt can be a huge barrier when it comes to saving. If you had plans to pay your debt once you paid your down payment or become mortgage-free, you may have to reconsider. If you attempt to apply for a mortgage with too much consumer debt, there is a high chance you will not qualify. For many, being able to qualify for the home they desire means first paying off their credit card debts. Besides, being a first-time homeowner will cost a lot of money due to repairs that may be needed, so it’s best to go into this chapter of your life debt-free.
5. First-Time Home Buyer Program
Announced in 2019, the First-Time Home Buyer Incentive Program (FTHBI) was created to make housing more affordable for first-time buyers in Canada. The way it works is the Canada Mortgage and Housing Corporation (CMHC) contributes to part of your down payment. In exchange, when you sell the home, they will receive the appreciation or loss that is acquired. For brand new homes, the CMHC will contribute up to 10%. For a previously loved home, they will contribute up to 5%.
Unfortunately, the downside to FTHBI is the restrictions it comes with. For example, you must be a first-time buyer when it comes to a home. On top of this, your salary must be $120,000 in the household and the maximum purchase price must be at under $565,000.
As mentioned before, the current housing market does not make paying a down payment an easy task. However, with some persistence and smart budgeting, it can be a reality for you! We hope our tips above on how to save for a down payment really resonate and help you during this exciting time. Remember, once you obtain that dream home and require a home insurance policy, give us a call or request a quote today!