The biggest barrier for First Time Home Buyers is coming up with the funds for a downpayment. So how are SO many first time buyers and millennials doing it?
Let’s start with the fundamentals. The minimum downpayment for a home is 5% but this is tiered based on purchase price… so most often it will be more than 5% unless you purchase under $500,000 and qualify to put down the minimum allowable.
Up to $500,000: 5% of purchase price
$500,001 - $999,999: 5% of first $500k + 10% portion of purchase price above $500k
$1,000,000 & up: 20% of purchase price
*Regardless of the purchase price if you put down LESS than 20% you’ll require mortgage default insurance (commonly referred to as CMCH Insurance)
The size of your down payment influences three things
The amount you put down at the beginning of your mortgage shapes three important outputs over the life of the mortgage:
- The home price you can afford
- The size of your mortgage and monthly payment
- The amount of CMHC insurance you pay
OKAY now that is out of the way… HOW are First Time Buyers saving $100,000+ for a downpayment & closing costs (when they don’t have the equity to leverage from another property)
đĄTraditional Sources of downpayment:
-Setting aside portion of paycheque on auto-pilot
-Setting aside funds outside of regular salary: gifts, bonuses, pay raises, tax refund, lottery winnings
-Investing within TFSA (stocks, bonds, ETFs, mutual funds)
-Gift from family member
-RRSP withdrawal
Typically the number one source of funds for homebuyers, is personal savings. These funds are sometimes the result of years of sweat, financial self-control and sacrifice. Personal savings often sit in a Tax-Free Savings Account (TFSA) where the money is invested in low-risk securities, waiting until the day it’s needed for a house purchase.
*Your regular Checking / Savings account is no place to ‘save’ your money. Consider low-risk investing options for shorter term
đĽTIP:Follow @ambitiousadulting to learn the basics on Investing!
đĄRRSP Home Buyers’ Plan
If you have been contributing to your RRSP, you know it is a NO NO to use these funds before retirement! One of the few ways you can withdraw funds tax free is under the Home Buyer’s Plan. This allows you to withdraw $35,000 tax-free or $70,000 between you and your spouse (âď¸Because you’re borrowing the money from your RRSP, you do have to pay it back. You’ll have 15 years to repay the amount in full, and the first repayment is due two years after the withdrawal. You must pay 1/15th of the total amount each year)
đ¸ Ways to amp up your savings:
-Consider a second job (weekend, evenings, online)
-Leverage a hobby & offer your freelance services (ie: photography, videography, content creation, marketing, jewelry, woodworking)
-Tutor students online
-Make online Canva Templates and sell on Etsy
-Start a side hustle, such as: Uber , Lyft, Etsy Shop
-Dog walking / pet sitting / personal training
-Multi level marketing
-Sell clothing, home items, books etc you don’t use anymore on Facebook marketplace or Kijiji
High-interest debt balances (loans, credit cards) can complicate your savings efforts. Some will argue it's better to pay off debt before you save. However, living without an emergency fund is risky. Should you have a surprise expense, you'd have to borrow more to cover it. To avoid that scenario, save what you can as you repay debt.
â¨TIps
- Maintain good credit rating. Keep your credit score in the ‘good to excellent’ range & monitor it frequently
- Pay down credit card & other debts so you aren’t paying high interest
- Track your spending habits and cut expenses where ever you can (cancel subscriptions you no longer use)
- You can still save while you are renting! Try to cut out as many unnecessary expenses as possible and amp up your income in other ways
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