You're ready to buy a house...how exciting!!! Happen to have a spare $50,000+ kicking around? Probably not but chances are that's what you're going to need to save up to put down a solid down payment. In Canada you have to put down at least 5% and if you want to avoid paying for the extra insurance coverage through CMHC you'll want to get that amount up to 20%. It's not a deal breaker but if you are willing to spend the time to save the extra money it can be worth it. If you are buying a $400,000 house with only 5% down you will end up paying $13,680 in CMHC premiums...that's not nothing. I do realize that saving up $20,000 is much different than saving $80,000 but do what you can. Play around with the mortgage calculator to figure out how much you can afford and how much you'll need to save to get into your dream home (or scaled back starter home).
Once you know how much you need to save you can get started on the actual saving plan!
First up is to figure out any resources you already have that you can tap to get started. Maybe you already have some money saved up in your savings account or TFSA? Perhaps your parents have offered to gift you some money for a down payment? Those are easy resources for money but don't forget about your RRSP's. If this is your first home purchase you can take advantage of the Home Buyer's Plan and pull money out of your RRSP's tax free. We'll be going into more detail about the HBP next week but for now just know that your RRSP's can come into play.
Where is the best place to save?
You want your money to grow tax free as much as possible so this makes your RRSP and TFSA the first choices. The advantage of your RRSP is that you will also get a tax refund on the amount you contribute so that can help bump up your savings. Remember though, you will have to pay back all withdrawals from your RRSP but since you'll be such a pro at saving this shouldn't be a problem. I would go RRSP first and if you run out of room there then go to your TFSA before looking at non-registered savings accounts.
What to invest in?
If you're time frame is short (less than 5 years), you'll want to stick with secure investments to protect your principal. Shop around for the best rate on high-interest savings or a money market fund and look for an institution that wont charge you administration fees for an RRSP and/or TFSA.
If you aren't planning to buy a home for more than 5 years you can start looking at other investments such as mutual funds or even stocks. You still don't want to take any big risks though so keep things conservative.
Make it Automatic
Once you know how much you need to save, where you're going to save it, and what you're going to invest it you need to make it happen. The best way to do this is to set up your contributions to run automatically so you can't be swayed by that new pair of shoes or just plain old forget. Set-up your contributions to coincide with your pay cheque; if you get paid bi-weekly then have your contributions run bi-weekly. Set a goal date to have the money saved up and figure out how much that works out to each period. If you want to save $50,000 towards your down payment in 3 years and will be making bi-weekly contributions you'll have to save about $960 each pay period...is that do-able? If not you'll need to adjust your numbers.
It's not going to happen overnight but saving up for a down payment is a necessary evil when buying a home. It will be worth it in the end though, and think of all that equity you'll have :)
1. Home Buying Series - Renting vs. Buying
2. Home Buying Series - Saving Your Down Payment
3. Home Buying Series - Home Buyer's Plan (HBP)
4. Home Buying Series - Mortgage Pre-Approval
5. Home Buying Series - House Hunting
6. Home Buying Series - Closing Costs