For a newcomer in Canada, house hunting can be a daunting task. The preparations for buying a house start way before in a family. Why? They need to save money for the down payment.
The saving process in itself takes years. You gotta cut off any extra expenditure, improve your credit score, and pay off the remaining debt. Though it is challenging, once you are ready then everything is worth the wait.
The main question that might pop up in your mind is – Are there other ways to save money for a Down Payment? The answer is Yes! Let us start exploring some amazing tips to save for a down payment.
What is the Minimum Down Payment in Canada?
A Down Payment is the amount you “pay in one go” when purchasing a house. It usually depends on the purchase price of the house. The remaining amount is then broken down into installments for periodical payments.
In Canada, it is important to know that DP varies as the cost increases. Here is a table that will help you understand the exact one-time payment you have to make. The values given are standard figures.
|Price of House
|At least 5%
|5% on First $500,000 and 10% on remaining amount
|At least 20%
Let us take a quick example:
- Suppose your home is worth $500,000. Then you have to pay a minimum of $25,000 as its down payment.
- If it is $700,000, then $45,000.
- Likewise, if it is $1,100,000, then it will be a whopping $220,000.
5 Tips to Save For a Down Payment in Canada
How to start saving? Given below are 5 Tips that will help you save for a down payment to buy a home in Canada.
1. Prioritize your Long Term Goals
It is not easy to save money for a home especially when it’s your first. Lots of hard work, financial issues, budgeting, planning, and sacrificing is done. One has to put his needs before his wants. You may also have to postpone your traveling goals to save money.
So, before jumping right away to make this decision, weigh everything. Decide if you are ready to delay your vacations, and your wants, and control your spending. If the answer is yes, then start doing it. Thus, prioritizing before starting is the key here.
2. Settle Any Existing or Prolonging Debt
Do you have any previous mortgage loans pending? Or any kind of loan? If yes, then it is the right time to start settling those. Because taking a home mortgage is an extremely long commitment. And you don’t want to add another burden for sure.
In addition to it, if you also have credit card debt then it will be extremely difficult to save money for down payments when you are already paying a significant amount of interest every month.
Thus, another useful tip is to settle any prolonged or existing debt and then start saving.
3. Constantly Check Your Credit Score
Irrespective of which mortgage you are applying for, having a good credit score in Canada is an eligibility criterion that must be fulfilled. How can you do it? By paying timely bills, not over-exceeding the limit, and being vigilant of any suspicious activities from your card.
Your credit history must be impeccable right from the time you start using a credit card. Pay the tuition fees, and vehicle tickets on time to prevent any negative impact on the score. It takes time to build a good history.
In fact, you can use credit cards for making small transactions and pay the dues on time to be in good books. All the reliable mortgage lenders will check your credit history before lending a single penny.
4. Use Money from your RRSP
RRSP is the Registered Retirement Savings Plan. It is quite a beneficial scheme for Canadians. But, remember, you can withdraw from RRSP as long as your funds are not in a locked-in plan. Also, there’s a portion of your RRSP withdrawal that’s subject to withholding tax.
However, under the Home Buyers’ Plan or HBP, the first time home buyers can withdraw up to $35,000 (per person) from their RRSP without paying withholding tax. You can avail this benefit you meet the eligibility criteria and other conditions.
If you and your spouse both have RRSP and you are withdrawing for the first time, then you can straightaway take $70,000 i.e. 35k each. Unlike TFSA, here you have to pay back the amount within 15 years.
Another catch is that the home you are planning to buy must become your principal place of residence. Then only the said benefit will be given to you.
5. Use Savings from TFSA
TFSA stands for Tax-Free Savings Account. In Canada, TFSAs are a wonderful way to save for down payments. It is considered a better option than RRSP because you can withdraw without any restrictions and time constraints.
There will also be no tax implications irrespective of the time or amount. If you have been managing your finances well then there is also a chance that you can use both TFSA as well as RRSP to settle the down payment.
Saving for Down Payment- Final Thoughts
It seems challenging to save such a huge amount for a down payment. But buying a home is a long-term goal of every family. If you start the process strategically and do it consistently, the time will come soon when you have your own house.
Being confused is fine, that is why there are many real estate brokers, banks, and other non-financial advisors to aid you. Luckily for Canadians, the loans can be easily amortized for as long as 30 years.
So, if you are successful in taking the first step, there will be plenty of time to pay off the debt.
What do you think is the easiest way to save for a down payment? Comment down below.