How much do you need for a down payment in 2023?
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When buying a home, there’s one key thing you’ll need upfront: a down payment. This is usually a hefty sum that will take you a few years to get together. Yet, the amount you save can make all the difference in your home ownership journey. Today, we will review a home down payment, the minimum amounts required, and some tips to guide you to save the perfect amount.
What is a home down payment?
A down payment is a lump sum of money paid upfront by the buyer when taking out a mortgage to purchase a home. It is usually equal to a percentage of the total purchase price and represents the buyer’s commitment to the purchase. The amount of the down payment will affect the size of the monthly payments on the loan, so buyers need to consider their budget carefully before deciding how much they can afford.
What are the requirements?
The minimum down payment in Canada on a home depends on the purchase price.
- For homes priced up to $500,000, the minimum required down payment is 5%.
- For any amount between $500,000 and $1 million, the minimum down payment is 5% of the first $500,000 and 10% of any amount over $500,000.
- The minimum down payment for homes over $1 million is 20%.
Why is a larger payment upfront better when buying a home?
The larger the down payment, the better. Why? The down payment on a home can reduce costs. First, it can decrease the total you owe on your loan, which helps to reduce the amount borrowed and ultimately leads to lower monthly mortgage payments. Moreover, a larger percentage down means you won’t have to secure mortgage loan insurance. This is an added monthly cost for those paying less than 20% upfront for a house.
How can you calculate this payment?
To calculate a minimum down payment when buying a home, you must know the loan amount and the percentage. Once you do, it’s easy to figure out the total upfront cost.
- For example, if you take out a loan for $400,000 with a 5% down payment requirement, your minimum down payment would be $20,000 (400,000 x 0.05).
What is mortgage loan insurance?
When applying for a mortgage loan, it is important to remember that you may need to obtain mortgage loan insurance if the size of your down payment is lower than 20%. This is because the more down payment you make, the less risky of an investment a lender deems your application to be.
The purpose of obtaining this kind of insurance is to guarantee lenders get paid back should the loan ever default. While typically a small amount, this cost must be considered when determining what kind of down payment makes sense for your budget. Be aware that this cost exists and factor it in when making financial decisions about your home loan.
Here are 5 ways to save up for your first home:
1. Save Automatically with a High-Interest Savings Account: Setting up automatic deposits into a high-interest savings account can help you save money quickly. A high-interest savings account is an easy way to earn money on your savings and ensure that you’re consistently adding to your down payment fund.
2. Start a Side Hustle: Taking on freelance or contract work in addition to your full-time job can bring in extra money for your down payment fund. With the rise of freelancing, there are more opportunities than ever to make extra cash.
3. Cut Back On Unnecessary Expenses: If you’re serious about saving, it’s essential to keep track of where your money is going and cut back on unnecessary expenses such as dining out, takeout, entertainment, and other “luxury” items that don’t need to be in your budget right now.
4. Take Advantage of Tax Benefits: Depending on where you live in Canada, provincial and federal tax benefits may be available for first-time home buyers, which can help you save towards a down payment faster.
5. Leverage Your RRSPs: The Home Buyers’ Plan (HBP) allows Canadians who have contributed to their Registered Retirement Savings Plans (RRSPs) to withdraw up to $35,000 per person for use as a down payment without any tax consequence. These funds must be repaid within fifteen years, beginning two years after the withdrawal date, with interest payments annually made into the RRSP accounts from which they were taken.
Wrapping it up
Ultimately, saving for a down payment can initially seem daunting, but several strategies are available to make the process easier. Using tax benefits, leveraging your RRSPs through the Home Buyers’ Plan, and researching low-down payment options like CMHC Insured Mortgages, you can plan to make the down payment for your dream home. With careful planning and research, you can put yourself in a better position to achieve homeownership sooner rather than later.
