Saving for a Down Payment

With escalating prices for real estate as well as consumer goods, saving up for a down payment on your first home can be tough. But if you’re thinking about leaping into the housing market without a minimal down payment, think again. Taking this route can become a financial mistake that hangs around for 25 years and add tens of thousands of dollars to the cost of your house. What’s more, failing to make your payments as interest rates rise could result in personal financial ruin.

While financial institutions will allow first-time buyers to take out a mortgage with less than a 20 percent down payment (as a percentage of the total cost of the house) these “high-ratio mortgages” also require extra insurance. Once you factor in the other costs of home ownership, such as realtor’s fees, GST or HST on new homes, taxes, and monthly maintenance fees (on strata title units), most financial advisors say it’s not a bargain at all. In the long run, it makes more financial sense to tighten your belt now, save aggressively, and buy a starter home with 20 percent down rather than getting a house now with less money.

Even on a high-ratio mortgage, consider the difference a few thousand dollars in a down payment can make. Take a $150,000 home, with an 8 per cent mortgage amortized over 25 years. With $15,000 down, the long term cost is $309,102. But with $25,000 down, the total is $286,206. An extra $10,000 upfront – perhaps only a few months more of saving -- lowers the overall cost by almost $23,000. Not sure about the math? Check out our online mortgage calculator at [Customization: insert website link].

How to save depends on when you plan to buy. If you’re looking to get into the market in the next two years, the safest investment vehicles are lower-risk products that provide modest, but guaranteed returns for your hard-earned dollars. The motto for short-term savers is “slow and steady wins the race.” A savings plan that includes taking an automatic percentage of your income and depositing it into high-interest GICs or low risk mutual funds (depending on your situation) will protect the principal, while allowing you to make the most money.

Those who plan to buy a home in the future – at least five years from now – have the same advantage as any long-term investor: time. They can take more risk, and reap greater rewards because they can park their money indefinitely. Higher risk investments, in the stock market for example, may lose money (on paper) over a year or even two, but they can pay big dividends over five years for investors who are happy to rent for the moment.

Everyone can take advantage of the federal government’s Home Buyer’s Plan, which allows first-time buyers to withdraw up to $25,000 (if purchased after January 27, 2009) from their RRSPs, tax free, to buy a home. The money needs to be repaid within 15 years, but given the savings that go with a bigger down payment, and the advantages that go with lowering your taxable income through RRSP contributions, it’s well worth the effort for most buyers.