Tuesday, September 12, 2017
Buying Your First Home: Saving for a Down Payment
Good morning friends and welcome back to our Tip of the Week. This week is all about mortgages so today’s tip will discuss saving for a down payment. For first-time home buyers, saving for that down payment can seem impossible. Saving any money is tough when you are young, let alone such a large amount. For a conventional mortgage, you need to save 20% for your down payment. That is a large amount of money for young people, even older people too. You can put a lower amount for your down payment but then you would be required to get mortgage loan insurance and pay a penalty raising your interest rate. Down payments usually range from $10,000 and up, so where does one come up with this money? In today’s post, I give 3 tips for you to save for your first down payment. Get your pen and paper handy.
1) Registered Retirement Savings Plan (RRSP) and the Home Buyers Plan (HBP)
The Government of Canada allows people to borrow from their RRSP’s tax-free if they are using it to buy their first home. Like the TFSA your money can grow while you save but unlike the TFSA you have to pay it back or you will pay tax. The 2nd year after you withdraw the money from your RRSP you have to start paying it back but you can pay it back over the course of 15 years. That’s a pretty good system for those trying to save for a home. If you took out 20K from your RRSP to buy your first home and paid it back over the next 16 years (1-year leeway + 15 years) it would only require you to pay back $104 a month to satisfy this loan. You can pay it back sooner if you want as well. You may ask yourself, why do I have to pay back my own money? Well, that’s the real beauty of the Home Buyer’s Plan. You still receive your tax deductions on your RRSP contributions. That means you get all the benefits of the RRSP without the negatives of tax come withdrawal time. It’s a great plan and a great way to save for a home.
2) Tax-Free Savings Account
Due to the nature of the Tax-Free Savings Account, it is ideal for saving for a home. Money invested does not get taxed once withdrawn. This allows your money to grow while you are saving and you are not penalized once you buy that home. One of the best features of the TFSA is that once you take your money out of it, you only have to wait until the next year and then you get all your contribution room back. That is pretty awesome! A good thing about the TFSA as well as that if opened strategically you can make sure you are not dipping into it. A general savings account can sometimes lead people to use that money, not for its intended purpose. That would put your whole plan in jeopardy. I highly recommend using a TFSA for saving for your first home. Once purchased, don’t stop there. Continue with using the TFSA as the great investment vehicle it is.
3) Borrowing for a Down Payment
This is a tricky one. While I don’t usually recommend borrowing to acquire debt, a home might be an exception. It all depends on the terms of the loan. You have to make sure the interest rate and repayment schedule are doable. You also have to make sure that getting the home right away is worth going into additional debt for the down payment. If saving for it fits your budget better, do that instead. There some amazing parents out there though that help their children out with a home down payment and at the very low-interest rate of 0%. That cannot be beaten but make sure you treat it like a loan and not a gift even though it is family. It’s all about making sure the terms of any loan are manageable and don’t put you in a worse spot than before. This is where the monthly budget becomes paramount.
There are many ways to save for a down payment, but the key is to start saving. Everyone should be saving their money and saving for a home is one of the best goals one can have. It is important to have all the information in front of you so you can make the best decision possible. Also, make sure you aren’t rushed into anything. Owning a home shouldn’t make you worse off. Make the plan, save the money, get the dream home. Sacrifices will have to be made but it is definitely worth it.
Thanks for reading my tip of the week and don’t forget to tune in tomorrow for my weekly rant about things that waste your money. If you have any questions or want to start your own home savings plan, please do not hesitate to contact me at email@example.com. Have a great day friends!
“What you get by achieving your goals is not as important as what you become by achieving your goals.” – Zig Ziglar
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