Canadian buyers need at least 20% of the purchase price as their down payment to avoid mortgage default insurance, which can be an enormous amount to save up. Many Canadians turn to family for help when saving the sum necessary.
To do this effectively, the best approach is a savings plan.
All you need to know about mortgage downpayment:
- Start Early
Your down payment on a home can help to lower debt-to-income ratio, which lenders use to determine credit risk.
Though saving for a down payment may seem challenging, starting early can make the process simpler. Evaluate your budget and expenses to uncover any savings opportunities; perhaps by canceling unnecessary subscriptions or dining out less frequently.
Establishing and sticking to a savings goal are essential. Automate your savings so that money is automatically deducted each payday into your down payment fund. Look into government programs such as RRSP Home Buyers Plan for first-time homebuyers as this could give tax advantages on savings made over time.
- Save as Much as You Can
Saving for a down payment can be challenging in markets with rising home prices, so setting a budget, identifying extra savings opportunities and cutting unnecessary spending will help speed your journey to reach your goal faster.
Nerdy Tip: If you have significant consumer debt, it is a smart idea to pay it down before beginning your savings journey. Doing this can significantly reduce interest costs while helping you to save more each month.
Automating your savings may help you reach homeownership sooner and avoid mortgage loan insurance - which can add thousands to the total cost of your mortgage over time.
- Look for Ways to Reduce Your Expenses
Spending too much of your savings for a down payment could leave you financially exposed after purchase. It is wise to have enough saved in an emergency fund and other assets so as to weather the initial costly years of homeownership, including medical costs, etc.
A higher down payment shows financial strength and commitment, increasing your chances of loan approval and decreasing total mortgage amount - saving money on interest and fees and potentially speeding up home ownership.
If you're having difficulty saving for a down payment, take a hard look at your budget and seek ways to reduce costs. Start by targeting large expenses that could be reduced - using that savings toward reaching your down payment goal.
- Get a Good Credit Score
An excellent credit score is important because potential lenders and creditors use it to assess your risk as a borrower and determine the interest rates and terms of any potential loans or credits extended to you.
An outstanding credit score indicates you are financially responsible, likely repaying debts on time and helping secure lower risk loan approval rates and optimal mortgage deals.
One of the best ways to raise your credit score is to reduce debt balances and make payments on time each month. You could also broaden your credit history by taking out different forms of loans while keeping account balances low.
- Don’t Wait for a Windfall
An unexpected inflow of cash may tempt you to accelerate your home-buying plans more quickly, but it would be wiser to use any windfalls for paying down debt or increasing emergency savings first - before considering using any for a down payment. Failure to do this could leave you vulnerable to financial hardship that can derail home-buying goals or lead to foreclosure altogether if recovery efforts cannot keep pace. Any windfalls should also be put aside in a savings account that's difficult or impossible for you to access; that includes tax refunds or work bonuses as potential temptations to withdraw them early!
