When buying a first home, the down payment comes with its share of questions. Where to start? What is the capital required to buy a property? What percentage of down payment between 5%, 10% and 20% is the most advantageous? How to raise the necessary money?
First, before you start raising money for your down payment, it is essential to understand how the down payment works and to determine the mortgage amount. To do this, make an appointment with a mortgage representative to discuss your options. A mortgage pre-approval will also give you the full picture of the maximum cost of the property you can afford, so you can figure out how much to save for the down payment.
What is a down payment?
First, the down payment is an amount you pay when buying a property that is deducted from the purchase price. Your mortgage then covers the remaining balance of the price of the property. In general, the amount of the down payment corresponds to a percentage between 5 and 20% of the sale price. The minimum percentage, however, depends on certain factors, including the type of property and the cost. The higher the purchase price, the higher the minimum down payment percentage will be.
Things to know about mortgage loan insurance
Mortgage loan insurance (or mortgage insurance) is mandatory when the down payment is less than 20% of the purchase price of the property. However, it may be required with a down payment of 20% or more if you are self-employed or have a bad credit history.
The goal of mortgage insurance is to protect the lender in the event that you are unable to make your payments. Mortgage insurance is generally provided by the Canada Mortgage and Housing Corporation (CMHC).
How the down payment affects the total cost of your mortgage
The amount of your down payment has a big impact on the total cost of your mortgage. As with any loan, the larger the amount you borrow, the more interest you will pay. So, with a larger down payment, you can take out a smaller mortgage, which can save you thousands of dollars.
It may therefore be beneficial to take the time to accumulate as much money as possible for your down payment before embarking on the purchase of a new property.
4 ways to raise the money for your first home down payment
Raising the money you need to buy your home can seem difficult and time consuming, but there are several ways you can do it.
1. Take advantage of your Registered Retirement Savings Plan (RRSP)
The federal government's Home Buyers' Plan (HBP) gives you the flexibility to use funds raised in your RRSP for the down payment on your first home. This program allows you to withdraw an amount up to $ 35,000. This option is available to people who have never owned a home or to people who haven't owned one for five years or more. You then have 15 years to repay the amount withdrawn to avoid paying taxes.
There are also other assistance programs to help with buying your first home. Take the time to educate yourself to find all the options available to you.
2. Opt for automatic savings
Another way to raise money for your down payment is to put an amount that is automatically withdrawn from your bank account each month into a savings account. So you don't have to think about it and you can be sure to save monthly. Additionally, by keeping your down payment in a separate account, in addition to making interest, you are not tempted to spend it and you have a concrete idea of how much you have.
3. Set up a budget
Budgeting is a great way to save money on a regular basis. A budget allows you to properly assess your expenses to know where to cut unnecessary purchases or to better manage your money in general. You will also be able to determine more easily and more precisely how much you are able to save each month according to your financial capacities.
4. Receive a donation from a loved one
This is an increasingly common practice with house prices rising dramatically. No matter the amount, the generosity of a loved one can go a long way in building up the money you need for the down payment.
It's never too early to start saving for your first home. Even the smallest actions can lead to big savings. If you are ready to get started in the process of buying a property, contact one of our Sutton real estate brokers to support you every step of the way.