Saving the down payment

Saving enough money for a down payment on a home can be difficult. Even if you use a “high ratio” Canadian Mortgage & Housing Corporation (CMHC) insured mortgage, you’ll still need a 5% to 10% down payment in order to purchase a home.

For a home purchase price of $200,000 to $400,000 or greater, you could need between $10,000 to $40,000 or more.

Three ways to save

1. A managed savings account

This point is simple and not surprising. Nothing beats the tried and true method of putting a set amount of money in savings on a monthly basis to build-up a down payment. In today’s real estate market, “conventional” financing, meaning a regular mortgage for 80% of the purchase price with 20% down which could require a buyer to come up with a significant amount of money.

This number can be daunting for someone who just landed their first job after university or is saving by themselves. Even when two people are contributing, it can be tough to feel confident that you can save enough money.

With the help of an expert financing advisor, the right combination of mortgage loan and down payment will enable you to live comfortably with the financial decision to own a home.

SKYIRE offers first-time buyers a managed savings program called HomeSaver, to help save for their first home. Using a new automated payment processing system, a weekly savings plan can be set up for you to help get you to your down payment savings target with as little as $120 per week.

This managed savings program is free to use and is a great way to effortlessly build-up the down payment required to purchase your first home.

You can join the HomeSaver program with 2 friends, each with their own savings goals, and have a chance to win rewards and prizes as a group for everyone achieving their savings targets on time. It’s a great way to support each other along the way and make sure everyone stays on track to reach their own individual savings target.

2. Your own RRSP can be used tax free

If you are first-time homebuyer as qualified by Canadian tax rules for this purpose, one approach you can take to covering the down payment is to withdraw funds from your Registered Retirement Saving Plan (RRSP) using the “Home Buyers’ Plan” (HBP) under the tax act. This plan allows you and your spouse or partner to withdraw up to $25,000 each from your RRSP to use toward the purchase of a home and associated closing costs.

Funds withdrawn from an RRSP account are not taxed as income, as long as you repay the total amount to your RRSP evenly over 15 years, starting the second year after you make the withdrawal. This means you can contribute to your RRSP to get a tax deduction up front, and then use those funds to purchase a home, then pay back the funds into the RRSP over time and avoid ever having to pay the tax.

If you don’t have enough cash at the end of the year to make a contribution to your RRSP, you can apply at a bank for an “RRSP contribution” loan. The bank will loan you money to contribute to your RRSP before the deadline for your tax deduction. You can take advantage of any un-used contribution room and then pay off the contribution loan over time, starting with the larger tax credit payment you’ll get back from the government in the spring of that year.

In either of these two cases, the repayment period for returning the funds back into your RRSP starts the second year following the year you made your withdrawal.

3. Family helping family

Some parents see the value in and are able to help their son or daughter get a strong start by purchasing their first home.

If you have support from family to help in funding the down payment, the bank will require that your parents provide a letter confirming that the money was provided to you with no expectation of a monthly payment. The bank needs to know that you have enough income to cover all of your debts and wouldn’t want the funding support provided by a family member to make this more difficult.

This is an option for some people, but not all. It is not the only way to purchase a home, so there is absolutely no need to feel disappointed if this is not possible for you.

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