Ways to raise money for a down payment
As you prepare to buy your home, there are a number of things to get ready - the largest and most important of which is your down payment. No matter the cost of your home, the down payment will be a substantial sum of money.
Saving for a down payment is often one of the most difficult parts of buying a home. It’s a big undertaking and can take years to accumulate, so you’ll want to take advantage of any incentives, benefits, and strategies for getting there faster.
To help you navigate this challenging task of raising money for a down payment, we’ll cover the following:
How much do you need for your down payment?
8 simple ways to raise money for your down payment
Let’s start by discussing how much you need for a down payment, after which we’ll cover strategies for saving.
How much do you need for your down payment?
A down payment can vary greatly depending on the cost of your home. In most cases, it’s the largest personal investment you’ll make.
Most lenders feel comfortable with a down payment of 20% of the home’s value, and this is an ideal number to aim for. Lenders will also often offer mortgages with down payments of 5% - 20%. It’s always important to remember that the lower your down payment, the higher your mortgage will be.
Despite your cash flow and the monthly or bi-weekly mortgage payments you can afford, your down payment is still a big factor that determines the home you are able to buy. Lowering your down payment can significantly increase the value of the home you are able to buy, but it also significantly increases how long you’ll need to pay off your mortgage, as you will be taking out a larger loan. It will be up to you to determine what you feel comfortable with as a down payment percentage. You can then use that as a way of determining what homes you can afford in the market you are looking at, and adjust the market you shop in or the size of home you are looking at accordingly.
PRO TIP: Remember, there will be a number of costs associated with closing the sale of your home (land transfer tax, legal fees, and property taxes to name a few). It’s a good idea to factor this into the cost of your home or reserve an amount of money for these expenses. This amount will be relative to the cost of your home, so consider that when evaluating what you can afford.
Buying a home is an expedient process (especially in a hot market), and you’ll need to be ready to buy. You won’t know the exact down payment amount until you choose a home. In most cases, you’ll need to save up a down payment over a long period of time, and keep tabs on the state of the housing market in the area you want to buy, so you have an idea of how close you are to having a down payment that buys the size of home you’re looking for.
The market is constantly changing, and you’ll need to account for that as you save. The cost of homes now is not what they will be in 2 years, and you’ll need to factor that into your savings plan.
8 simple ways to raise money for your down payment
Saving for your down payment is going to be a challenging, slow process. It’s often the biggest barrier to entry for homebuyers. Luckily, there are ways to raise money for your down payment, and cut the time to home ownership. Below, we cover some of the best ways to save and raise capital for your down payment.
1. Limit spending and turn pennies into big savings
When saving for a home, every little bit counts - and adds up! Penny pinching can be a great way to save up extra money that can go towards your down payment. Instead of buying a coffee on the road, make coffee at home for a fraction of the cost, putting that money towards your savings instead. Saving money on small luxuries like this can go a long way over the course of a year, allowing you to grow your down payment significantly.
Any extra lump sums you’re given throughout the year, such as your tax refund or a work bonus, should also go towards savings. Rather than putting them towards a ‘special’ item you otherwise wouldn’t buy, add them to your down payment savings, closing the gap to home ownership.
2. Liquidate investments
Investments are typically in service of saving a large sum of money for a major purchase, such as your home. When the time is right, you’ll want to cash in some of your investments in order to have enough liquid capital for your down payment.
When you have a good handle on the market and you’re ready to start making offers on homes, you’ll want to make sure you have your down payment ready. Before this time, you’ll need to consider what invests you’re willing to liquidate to put towards your down payment. Cash in stocks, mutual funds, and other investments to ensure your capital is accessible for your down payment.
3. Sell off assets and other valuables
In some cases, it can be beneficial to liquidate high-value assets as well. While it’s not always possible, now is a great time to turn them into cash, helping you afford your down payment sooner. If you’re a two car household that can manage with one, consider selling one car for additional funds, or removing your car payments to help you qualify for a better mortgage amount.
It can also be a great idea to sell personal belongings (whether a traditional garage sale or a online via a sales network like Kijiji) that you no longer use. While these items may only be worth small amounts individually, liquidating a large number of valuables can be a great way to gather an extra bit of cash that can be added to your down payment.
4. Add new sources of income
Whether it’s a part-time job or a side-hustle, generating more income is always a great way to save for your down payment faster. However, this is only true if you make sure you’re strict about saving all of this additional cash for your actual down payment.
This may not always be feasible, for a number of varied (yet obvious) reasons. For most people, a single full-time job is more than enough to manage, so it’s not easy to add additional work hours. Every little bit counts, so turning a hobby or passion into a side-hustle that garners some extra income is also a great tactic to grow your down payment.
5. Make good banking decisions
While there is only so much you can do in this department, it’s important to make your money work for you. Take advantage of a tax free savings account (TFSA), which allows you to save money without having to pay income tax on interest earned. Be sure to keep credit card payments up-to-date, and don’t overspend.
Overall, you want to do your best to manage your money efficiently, taking advantage of benefits where possible.
6. Draw from your RRSP
The Government of Canada offers the Home Buyer’s Plan (HBP), which is a program that lets you withdraw from your registered retirement savings plans (RRSPs) and put that value toward a home. As of March 19th of 2019, the withdrawal limit of the HBP is $35,000 (this is subject to change, so be sure to check the current value, as well as qualifications and stipulations).
This program allows participants to pay back the withdrawn funds over a 15-year period. In some cases, this can be a good strategy to get into home ownership. Keep in mind that this money will need to be paid back eventually, and you will need to save accordingly. While there are no penalties if the money is paid back, it can be costly if you fail to pay it back when required.
7. First-time buyer incentives and benefits
If you’re a first time buyer, there are a number of incentives and benefits that you may qualify for. Two of the biggest are the first-time home buyer incentive and the land transfer tax rebate. We cover both below:
First-Time Home Buyer Incentive
The First-Time Home Buyer Incentive is offered by the Government of Canada through the Canada Mortgage and Housing Corporation (CMHC), and is designed to offer assistance without adding to the financial burden of purchasing a home. This incentive offers:
5% or 10% for a first-time buyer’s purchase of a newly constructed home
5% for a first-time buyer’s purchase of a resale (existing) home
5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home
Essentially, the Government of Canada purchases the home with you, and ‘owns’ that portion of your home. When you sell your home, they will receive the proportional amount of the sale value of your home.
For example: If you purchase a home at $400,000 and qualify for 5%, you would receive $20,000.
In the future, if you sell the home for $600,000, the Government of Canada would receive 5% of that sale, totalling $30,000. Alternatively, if the house sells for only $300,000, the Government of Canada would still receive 5%, totalling $15,000 ($5,000 less than that $20,000 they initially loaned you).
Ultimately, there is little downside, aside from missing out on the equity in the home assuming that it appreciates. However, the upsides are significant, as they allow you to buy-in to your first home earlier, as well as mitigate risk associated with the loss of property value. It also reduces your mortgage payments in a meaningful way by reducing your total mortgage loan amount.
To qualify, homebuyers need to have an annual income of $120,000 or less. Additionally, the value of both the participant’s mortgage and the incentive amount cannot be greater than four times the value of the participant’s qualified income.
Learn all the details about this incentive from the government site, including eligibility and how to apply.
Land transfer tax refund
First-time home buyers in Ontario can also receive a land transfer tax refund as high as $4,000. As long as your home is $368,000 or less, you’ll qualify for the maximum amount. While you will still need to come up with these funds at the time of purchase, knowing you’ll get this back is important to keep in mind.
PRO TIP: In Toronto, your home price has to be $400,000 or less to qualify for the maximum amount, and you may be entitled to receive a municipal tax rebate on top of the provincial tax rebate.
The land transfer tax rates can vary drastically based on where you live and the cost of your home. To get an idea of how these costs can vary, see a comparison between a $300,000 and $800,000 home in different Ontario cities.
8. Down payment assistance programs
To help make homes more affordable for low-income homes, homebuyers can take advantage of a variety of different down payment assistance programs - if they know where to look. These incentives are often aimed at low-income households that may have a harder time saving up for a down payment.
One of the most well known, the Government of Ontario offers interest-free down-payment assistance loans under the Canada-Ontario Affordable Housing Homeownership Program. The qualifications and loan stipulations vary slightly based on region and municipality, but in general, these AHP loans are for a period of 20 years, with that entire period being interest-free.
The Region of Waterloo, for example, has the Affordable Home Ownership (AHO) program, which offers a forgivable loan of 5% of the home equity, which is interest free after 20 years.
Even with these strategies, saving for a down payment is a daunting, challenging task that requires discipline and diligence. Determining the right down payment amount means staying on top of the market and knowing the value of homes in the area you’re looking in, and determining what a reasonable down payment is for you.
Ultimately, using as many of the above tactics as you can will allow you to pool the largest sum of money for your down payment. All of these strategies are useful, and some will work better for different people, so test what works best for you and what helps you save.
Once you’ve saved up and you’re ready to buy, contact me to start looking for your dream home!