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How to Save for a Down Payment for a Home in Canada ?

How to Save for a Down Payment for a Home in Canada ?


David Doe

Published in

Real Estate

28 Nov 2021

As a newcomer to Canada, house seeking might be difficult, but it doesn't have to be complicated. It takes time and effort to save home's down payment. It may be necessary to cut back on other areas of spending, such as travel and dining out, in order to improve your credit score. If you're a newbie to Canada who dreams of owning a home, these guidelines can help you achieve your objectives, acquire a mortgage, and make your homeownership aspirations a reality.

This article includes the following sections:

  • What is the concept of a down payment ?
  • How to calculate how much a down payment should be in Canada ?
  • How a down payment affects your mortgage's total cost ?
  • How to Save for a Down Payment in Canada: 7 Tips

What is the concept of a down payment ?

A down payment is a lump sum of money used to cover a portion of the cost of a large purchase, such as a home. It's usually paid in cash or equivalent, and it can't be charged to your credit card. In Canada, a down payment is frequently required in order to be approved for a mortgage. Your down payment will be deducted from the purchase price of your home, and the remaining amount will be financed.

How to calculate how much a down payment should be in Canada ?

If the total purchase price of your home is less than $500,000, the minimum down payment in Canada is 5%. If the purchase price is between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000 and 10% of the purchase price over $500,000. The minimum down payment in Canada is 20% if the total cost of your home is $1 million or more. Your lender may require a larger down payment if you're self-employed or have a bad credit history.

How a down payment affects your mortgage's total cost ?

The greater your down payment, the lower your mortgage insurance premiums will be. The lender is protected by mortgage loan insurance if you default on your payments. You must purchase mortgage loan insurance if your down payment is less than 20% of the total purchase price. A premium is a fee you pay for mortgage loan insurance that typically ranges from 0.6 to 4.5 percent of your total mortgage cost. It's important to note that if you can't make your payments, this insurance won't help you.

down payment

How to Save for a Down Payment in Canada ?

Here are seven tips to help newcomers in Canada save for a down payment on their first home !

  1. Prioritize your financial and life goals

Saving for a large purchase, such as a first home, is difficult. When it comes to budgeting and weighing your "wants" versus "needs," it usually necessitates hard choices. Vacations, eating out at restaurants and even everyday items like clothing and expensive groceries may have to be reduced. If saving for a down payment is a top priority for you, look for other parts of your life where you can save money. Making a detailed financial plan that lays out your path to down payment is critical. Consider scheduling an appointment with Guglu Homes, a financial advisor, if you're unsure how to make a plan.

  1. Pay off your debts before examining a mortgage

A mortgage is a significant financial commitment. If you have any other debts, try to pay them off before taking on another. This is especially true if you have credit card debt; it's difficult to save for a down payment when you're paying monthly interest fees. Getting rid of other debts can also help you improve your credit score and qualify for a mortgage at a better rate.

  1. Retain your credit score in excellent standing

If you want to qualify for a good rate on a mortgage, it's critical to keep your credit score in good shape. Paying all of your bills on time, never exceeding your credit card limits, and keeping track of any suspicious activity on your cards or in your bank account are all simple ways to do this. You'll also want to establish a credit history in Canada by using credit cards on a regular basis and repaying loans for things like university tuition or a vehicle. This demonstrates to potential mortgage lenders that you are dependable when it comes to repaying your debts.

  1. Take from your RRSP

Did you know that you can take out a tax-free loan of up to $35,000 CAD from your Registered Retirement Savings Plan (RRSP) to put towards your first home in Canada? You can each borrow up to $70,000 CAD from your RRSP if you and your spouse are both first-time home buyers. You'll have to repay the funds over the course of 15 years, but it's a great way to boost your down payment. To be eligible for this program, you must intend to use the house as your primary residence within one year of purchasing or constructing it.

  1. Get advantage of the First-Time Home Buyer Incentive

The First-Time Home Buyer Incentive in Canada can assist you in lowering your monthly mortgage payments. The incentive is a shared-equity mortgage with the Canadian government, which means the government contributes to the cost of your home. This means that if the value of your home increases, they will profit as well. The incentive offers first-time home buyers 5% to 10% off the total purchase price of a newly constructed home, 5% off the purchase price of an existing home, and 5% off the purchase price of a new or resale mobile/manufactured home. Your down payment will be increased by this amount. This means your mortgage will be for a lower amount, and your monthly payments will be lower as a result. The incentive must be repaid within 25 years or when the home is sold, whichever comes first.

  1. Use savings from your TFSA

When it comes to saving for down payments in Canada, Tax-Free Savings Accounts (TFSAs) are a great option. They're a better option than using your RRSP to fund a down payment because you can take money out of them whenever you want and there's no time limit on when you have to pay it back. A TFSA can be accessed at any time and for any purpose without incurring any tax consequences. For your down payment, you may be able to use funds from both your RRSP and TFSA accounts.

  1. Factor in maintenance costs and other fees

Keep in mind that buying a home entails more than just the purchase price. Include all maintenance costs and fees, such as legal fees, home inspection fees, land survey fees, appraisal fees, land transfer taxes, and new home warranties, in your calculations. These are usually not optional purchases, and they can add thousands of dollars to your final bill. It's critical to factor them into your budget.

What to Do When Saving for a Down Payment Feels Overwhelming ?

For many Canadians, saving home's down payment is an important goal, but it is also a difficult one. As a newcomer to Canada, purchasing your first home is a significant achievement. Every person's condition is different. In addition to these suggestions, you should consult a financial advisor for advice on saving for a down payment and realising your homeownership goals. If you want to buy a house in the next few years, schedule an appointment with a Dale Mundi Advisor today to create a financial plan and make your dream a reality.

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