Are you preparing to buy a home? Before you can reach this major milestone, you’ll need to go through the purchase process—and that includes making a down payment. While parting with a sizeable sum of money is never fun, knowing what to expect can make things easier. That means taking the time to understand how down payments work—a step that will equip you to set the right price range, save up effectively, and prepare for a smooth and efficient purchase.
If you’re planning to buy a home, here’s what you should know about down payments…
Down payment requirements
When you make an offer on a home, you’ll most likely submit a deposit to show the sellers that you’re serious. This amount will make up part of your down payment. The remainder will be due at closing.
Your minimum down payment will depend on how much your home costs. If it’s $500,000 or less, the lowest amount you can put down is 5 per cent of your purchase price. If it’s up to $999,999, you’ll pay at least 5 per cent on the first $500,000, and 10 per cent on any remaining amount over and above that. Lastly, if your home is upwards of $1 million, your minimum down payment will sit at 20 per cent of your property’s price.
How much should you save for your down payment?
To determine the amount you should set aside, you’ll want to get a sense of how much you’re likely to pay for a home. Start by staying on top of average prices for properties that meet your criteria. From there, you’ll need to decide whether you want to put down the minimum—or a larger dollar amount.
There are benefits to making a down payment of 20 per cent, even when it’s not a requirement. Most significantly, doing so will usually allow you to avoid purchasing mortgage default insurance (though your credit may also play a role in whether you must take this step). If you do have to buy it, the premium will range from 0.6 to 4.5 per cent of your home price—depending on your down payment amount. This type of insurance applies to properties under $1 million.
Another major consideration is how long you’ll have to pay off your mortgage. If you put down 20 per cent, your amortization period could be up to 35 years. If you pay less, you’ll have 25 years at most.
Tips for saving
Putting aside enough for a down payment may seem daunting, but it’s entirely possible to make steady progress toward your goal. If you’re trying to save the money you’ll need to put down on a home, here are a few helpful tips to make it happen.
Pay off your debt
It’s very difficult to save up when your debt is accumulating. Fortunately, tackling the amount you owe can help you fast-track the process. Start by paying down your high-interest credit cards, then chip away at any other debts from there.
Cut down on spending
It may seem like an obvious point, but spending less can help you save more. From takeout meals to retail purchases, most homeowners spend a lot more than they think on things they don’t need. Cutting down on unnecessary costs will help you build up that down payment quicker.
Automate your savings
It’s all too easy to forget about putting money aside when you get paid. For this reason, many home buyers set up their banking so that a certain amount is automatically withdrawn from each paycheque—and deposited into a savings account.
Use your RRSP
If you have a sizeable RRSP, you can also tap into it through the federal Home Buyer’s Plan to help cover your down payment. The program allows you to take $35,000 from this fund—and gives you 15 years to pay it back.
Knowing how to save for and submit a down payment is an integral part of making a home purchase. If you have questions about the steps to buying your dream property, be sure to ask a local real estate agent with an excellent track record.
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