Six Savvy Ways to Save for a Down-Payment on your First Home

Jul 7, 2016

Purchasing your first home is one of the most exciting experiences you will have in your life, and is one of the largest purchases you will ever make. For those dreaming of being a first-time homebuyer, it’s advisable to start planning for that purchase today.

When purchasing a home, generally your down payment must be at least 5 percent of the purchase price. However, Canada’s new mortgage rules now require a 10 percent down-payment on the portion of the price of a home over $500,000. Additionally, anything less than a 20 percent down payment means you’ll have to purchase mortgage default insurance, or CMHC insurance.

For first-time home buyers looking to take the leap from renting, employing a touch of sacrifice in your everyday living can help save up for a down-payment. Marlin Spring has compiled six savvy ways to save for a down-payment.

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Public Transit

This day in age, many communities are investing in the expansion of public transit and bike lanes, making more eco-friendly and liveable cities. Selling your car may not be as much of a sacrifice as you think–and it is well worth the savings. Ridding your expenses of fixed costs such as parking, insurance, gas, maintenance and possibly car payments can make a major impact on your savings account. You’ll also be protected against the risk of financially catastrophic four-figure mechanic bills. For those times when walking or transit doesn’t cut it, rentals or car-sharing services are now readily available, as well as cost effective. If quitting your car cold turkey gives you a flutter of panic, try parking your car for a couple of months, and then sell your vehicle once you’ve transitioned to the car-free lifestyle. You’ll be in for some big savings!

Down-grade your current living situations

The quickest way to get into the housing market is to maximize savings. If you’re paying for your own one or two bedroom apartment, the rent is likely hefty. You have several options to consider when downgrading your current living situation. Often, moving several blocks away from a city’s main attractions can lower the rent, while not placing too much strain on your lifestyle. Another strategy is to switch to a one bedroom or bachelor unit in order to lower your rental costs. Sell furniture and possessions that won’t fit in your new, smaller place, or store them at a friend’s, or at your parent’s’ place. Refrain from spending money on a storage unit. If you’re not willing to trade in square footage for savings, sharing a rental lease with roommates can lower your costs, while keeping the perks of a larger living area. A dwelling downgrade can be a big adjustment–but just think of how much closer it will get you to attaining your dream home.

Pay off your credit card debts first

Saving money is not nearly as effective if you are paying a lot of interest on your credit card. It is advisable to first pay off all of your debts before saving. Begin with your smallest high interest debt, and pay it off. From there, take the minimum payment from that debt and use it to help you pay off the next smallest debt that has the highest interest rate–and so on. The minimum payments that you used to pay on your smaller debts can help you pay off your next debt faster. This strategy is savvy since it creates a snowball effect, as the minimum payments you are freeing up will help you to make larger and larger payments against one debt at a time.

Stop buying lunch

Those highly anticipated lunch breaks are a time to get out of the office, stretch your legs and socialize with coworkers over the latest lunch specials. They are also, very expensive when you add it up. Dining out for lunch or ordering takeout each day at work can accumulate quickly. Bringing your own brown bag lunch each day at work can save you thousands. Simply preparing a little extra the night before or waking up a little earlier to make a sandwich will help you contribute a lot to your down-payment fund. It’s easy to spend $10-$15 a day on lunch and coffee breaks. Think ahead by either picking up the right groceries to make your own lunch for the week, or incorporate after-dinner leftovers. You may find that you were only eating that fast food or food-court lunch out of convenience. Brown bagging has the added benefit of generally being a fresher and healthier meal.

Borrow from your RRSP

To purchase your first home you can withdraw up to $25,000 tax-free from your RRSP–a great way to come up with a down payment if you already have some RRSPs. If you don’t, this may be a smart option to save money for your RRSP while at the same time get a tax credit to reduce your taxes. The catch to this program is that you have to pay the money back to your RRSP within 15 years, otherwise it is treated as income, and you will have to pay tax on the money you withdrew as though it were income. Your financial planner can go over the details and help you decide whether this option is right for you.

Set up an automated savings plan

Unless you are a saver by nature,setting up an automated savings process is essential. Allocating a certain percentage or dollar amount of your regular paycheque to go directly into a high interest savings account will give you a regular contribution to your down-payment fund. The automatic process is smart because it is, in a sense, invisible. Money moves from your paycheque to your dedicated savings account without you even seeing it happen. This strategy mentally re-calibrates your financial situation, giving you less to budget your living expenses. The amount that you put away should, however,  be practical–allowing you to save the highest amount of money, while leaving you room to breathe.  The automatic withdrawal gets rid of the temptation and ability to spend the money on other purposes. Equally as important–don’t forget to bank any periodic revenue such as income-tax refunds, gifts received, bonuses or large commission checks. By depositing these funds into your down payment savings account, you fast-forward the process of saving money to buy your future dream home.

Your goal should be to save as large a down payment as possible. The bigger your down payment, the smaller your mortgage loan, which means you’ll save thousands in interest charges over the length of your mortgage. Marlin Spring knows you work hard for your money. These six savvy downpayment savings tips will help you achieve your dream, and purchase the quality, architecturally stunning home you deserve.