Home-buying 101: the lowdown on making the down payment
Depending on where you are on the pay grid, saving for a down payment can seem a little daunting.
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After all, that’s a large chunk of money to put down all at once—especially with other financial obligations (such as pension contributions, rent, car payments, debt, day-to-day expenses, etc.).
However, the best approach to any goal in life, financial or otherwise, is to put a solid plan in place to get you there. Saving for a mortgage down payment is no different.
To develop your own specific down payment savings strategy, you’ll need to:
- Determine the minimum amount of money you’ll need for down payment and closing costs on the house/condo you want (so you know how much you’ll need to save)
- Start paying off credit cards, loans, and other debt—it’ll help you to maximize your cash flow once you have to make monthly mortgage payments, pay property taxes, and all the other expenses that come with owning your own home (Here are some helpful tips for paying down debt)
- Consider the option to ‘borrow’ from your RRSP or withdraw from your TFSA (if you have those investments to draw from)
Determining your minimum down payment amount.
- If your purchase price is under $500,000, your minimum down payment is 5% of the purchase price
- If your purchase price is between $500,000 – $999,999, your minimum down payment is 5% of the first $500,000, plus 10% of the remaining amount above $500,000
- If your purchase price is over $1,000,000, your minimum down payment is 20% of the purchase price
Any down payment less than 20% of the purchase price requires mortgage default insurance.
While you’re only obligated to make the minimum down payment, keep in mind you will also have to purchase mortgage default insurance if your down payment is below 20% (which protects the lender should you default on your payments). Mortgage default insurance is available only for properties with a purchase price below $1,000,000. The three main providers of this type of insurance in Canada are Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. The premiums are the same for all three insurance providers.
How much will mortgage default insurance cost?
The mortgage default insurance premium varies depending on how much of your down payment is below the 20% threshold. Typically the cost can range between 2.8% to 4.0% of the total borrowed amount depending on the percentage of down payment paid on your purchase price. The premium is then added to the total cost of your mortgage and becomes a part of your monthly mortgage payments.
Start paying down debt.
Trying to save money for your mortgage down payment while continuing to make high-interest debt payments is kind of like taking one step forward and two steps back. Any savings progress will be painfully slow. With your debt out of the way (or at least severely reduced), more of your money will go towards saving for your down payment instead of toward high-interest debt payments.
Have an RRSP? Leverage the Home Buyer’s Plan.
If you’re a first-time home buyer and one of the many education members making regular contributions to your Registered Retirement Savings Plan (RRSP), the Home Buyers’ Plan (HBP) allows you to make a tax-free loan from your RRSP to use for a down payment. Yes, we said tax-free. The withdrawal from your RRSP does not have to be included on your annual income tax return and no tax is taken off the funds you withdraw.
In order to take advantage of the Home Buyers’ Plan:
- You’ll need to meet certain conditions in order to be eligible to participate in the HBP, such as being a first-time buyer and having proof that you’re building or buying a home (one exception to the rule is if you’re helping a related person with a disability build or buy their primary home). For a full list of qualifying conditions, visit the CRA website
- You can withdraw no more than $35,000 from your RRSP—however, if you’re purchasing a home with your spouse, partner, or someone else, each of you can withdraw up to $35,000 (by the way, you don’t have to use all of that money strictly towards making a down payment, but you can use a portion of it for buying new furniture and to put towards closing costs, etc.)
- RRSP contributions must have been in your account for at least 90 days before they can be withdrawn
- You must start paying back the funds the year after you make the initial withdrawal (total amount must be paid back in full within 15 years, with your first payments starting the year after you make the initial withdrawal. If you do not repay the amount due in a given year, it is included in your taxable income for that year and you’ll have to pay income tax on this amount)
If you have a Tax-Free Savings Account, then perhaps leverage that over the Home Buyers’ Plan.
While the Home Buyer’s Plan is a great benefit to take advantage of, having to pay back the funds within a defined timeframe could be a downside—especially those first years of owning (when most of your savings will be depleted). If you have the funds saved up in your Tax-Free Savings Account, you may want to consider withdrawing from that instead, since any amount you withdraw from a TFSA is yours to use as you wish. Plus there’s no limit as to when you need to pay that amount back, if ever.
Need help coming up with a down payment strategy? We can help with that.
Educators Financial Group understands your pay grid and the unique financial challenges you face. That’s how we’ve been able to make education members’ dreams of home ownership come true since 1975. We can do the same for you!
Have one of our mortgage agents contact you to review your financial plan and put your down payment savings strategy into motion!
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