PLANNING AHEAD IS CRUCIAL TO SAVE FOR A DOWN PAYMENT
The secret to savings success is putting yourself on a regular investment plan.
The first question most people ask when considering buying a home is how much they need for a down payment.
But coming up with an exact number for a down payment isn’t that simple, says Barry Gollom, vice-president, mortgages and lending at CIBC. “It really depends on a number of factors, from what you are able to afford and the area where you’re thinking of buying to your situation in life and your comfort zone.”
The minimum down payment requirement in Canada is 5%. Anyone putting down less than 20% must also purchase mortgage insurance. Premiums for that can range from 0.5% to 2.75% of a total mortgage amount, depending on the down payment percentage.
This leads to a couple of key considerations, Gollom says. “The first is the fact that the insurance premium is added to the mortgage, which means interest charges. The second is the lower the down payment, the less equity you have in the home. A minimum down payment could mean you have very little equity during the early stages of your mortgage.”
It can take years for most people to save for that down payment, Gollom adds. Saving early and saving regularly can help you build a nest egg to meet some of your life goals. “Any intention to purchase a home, whether in the near-term or in the future, should be part of a conversation with your adviser, along with retirement planning, your children’s education and other topics.”
A first step in setting an overall home buying plan is establishing a complete list of your current and future priorities. These could include determining the home’s location, considering local transportation and schools, and thinking about type of dwelling. Other factors that come into play include salary projections, lifestyle needs, children’s education and retirement planning.
“Answering those questions will guide what is realistic for you,” Gollom says. “But the most important one is how comfortable are you with your decision?”
He says one fallback for many young people thinking about a down payment is the “bank of mom and dad.” “For anyone fortunate enough to have access to that support, it’s important to have that conversation early on because it will help set your expectations.”
First-time buyers can also leverage the Home Buyers Plan, which allows individuals to withdraw up to $25,000 from their registered retirement savings plan tax-free towards a down payment. “This does have to be repaid over 15 years,” Gollom notes. “A tax-free savings account is another wonderful vehicle to save for a down payment. As of 2015, the maximum aggregate TFSA contribution is $36,500.”
Scott Hannah, president of the Credit Counselling Society in New Westminster, B.C. agrees that individuals need to get themselves well-positioned financially well ahead of taking on a mortgage. “Once you know what you are moving toward, it’s a heck of lot easier to save the money you need.”
That time should be spent getting rid of any consumer debt (e.g. student loans, car, credit cards) and taking steps to cut back on spending. “You should look at every type of expense with the goal of cutting five to 10%,” Hannah says. “You can save all sorts of money if you do things like getting rid of a second car, shopping around for better rates for things like insurance policies or phone services, or downsizing vacation plans.”
The secret to savings success is putting yourself on a regular investment plan, Gollom says. “No matter what stage of life you are at, you should be setting something up where funds automatically come out weekly, bi-weekly or monthly. It’s incredible how that will grow over time.”
While it sounds daunting, saving for a down payment boils down to a simple principle he says. “You have to think about saving before you start borrowing.” THIS STORY WAS PRODUCED BY POSTMEDIA WORKS ON BEHALF OF CIBC FOR COMMERCIAL PURPOSES. POSTMEDIA’S EDITORIAL DEPARTMENTS HAD NO INVOLVEMENT IN THE CREATION OF THIS CONTENT.