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Getting ready to trade in your monthly rent payments for homeownership is an exciting step. But with it comes the need to take a long, hard look at your finances. Follow these 5 tips on how to save for a house.
To get a comprehensive overview of where you stand financially, create a budget by listing out your income, expenses, debts and other assets and liabilities. This can help determine how much you can afford to spend, where you can buy and ultimately how much to save for a down payment.
If you know you’ll be buying a house in the near future, try to cut back on unnecessary expenses. Or if you have the time, consider starting a side business that could generate a bit of extra income for your savings.
Look into cities or neighborhoods you’d consider living in, different property types and average housing prices to get an idea of what the market looks like. Then, read up on the mortgage loan options you might qualify for.
Determine how much you want to save for a down payment and how long you have to save. Coming up with monthly deposit goals that work for your financial situation will help you stay focused and make progress. For example, if you can save $500 a month according to your budget, and you’re saving up for a $24,000 down payment, then you know it’ll take 4 years to save up enough funds.
Keep in mind that besides the down payment, you’ll also have to pay a whole set of other fees like closing costs and maybe even mortgage insurance. Total closing costs usually run anywhere from 1.50% to 4.00% of the cost of the home, depending on your lender. This means if you purchase a home for $300,000 with a 3.00% closing cost, you’ll have to pay $9,000 upfront – on top of the down payment.
Once you’ve set your down payment savings goal, store the funds in a high-yield savings account with a competitive APY, low fees and a minimum deposit you can comfortably meet. If you’re buying a house with a partner, opening a joint savings account can help you save and earn interest together. If your current savings account doesn’t have a high APY, consider comparing other options to find one that will help you earn more.
Take advantage of autosave, roundups or any other features that let you automate your monthly contributions – that way your savings happen out of sight and out of mind. Treating these contributions like a mandatory monthly expense will help make saving a habit.
Eliminating debt has two benefits. First, less debt means more money you can put toward your savings. But more importantly, paying off debt lowers your debt-to-income ratio, which increases your chances of mortgage approval. As you pay off debts and cancel bills, consider rerouting those payments into your dedicated savings account.
While housing costs may vary, the down payment will be the biggest upfront cost for your home. The minimum down payment you’ll need depends on the cost of the home you want to buy. Keep in mind too that some institutions may require a higher down payment if you are self-employed or have a low credit score.
There are 3 tiers which determine the minimum down payment required:
If your down payment is less than 20.00%, your loan is considered a “high-ratio mortgage” and you’ll need to pay for mortgage loan insurance. This additional insurance provides the lender protection should you default on your mortgage. Because mortgage loan insurance is commonly obtained through the Canada Mortgage and Housing Corporation, it is often referred to as CMHC insurance. Even with a 20.00% down payment, lenders may require you to purchase mortgage loan insurance if your credit score is low or if you’re self-employed. Premiums for mortgage loan insurance typically range anywhere from 0.60% to 4.50% of your mortgage.
According to The Canadian Real Estate Association, the average house price as of June 2020 was $494,476. Using this data, you can see how much the down payment varies:
|Average purchase price||Percent down||Down payment amount|
The price of a house can vary widely across Canada. For example, the average price in the Greater Toronto Area in Ontario is $870,000, and the average price in the Halifax-Dartmouth area in Nova Scotia is $359,958.
Beyond the down payment and actual cost of the home, there are a handful of other mortgage costs that can come with buying a house. What you pay depends on factors like how far you move, the size of your house and the type of loan you apply for. Here’s an example of what you can expect:
Closing costs include the following:
Consider opening a low-risk account to help save for a house.
A savings account generally pays 0.10% to over 2.00% APY and has low balance requirements and low monthly fees. Traditional savings accounts may give you more ways to access your money, but online savings accounts reward you with the highest APYs. Some even come with features like autosave or budgeting tools.
Once you have a chunk of money saved, consider a GIC to lock away your money for a fixed term — all while earning interest. Depending on your deposit amount and the term length, your deposit could earn anywhere from 1-4% APY. However, you usually can’t add money to your GIC during the term, and you’ll likely pay a penalty to withdraw before the maturity date.
Consider these factors before opening an account:
Use the table below to compare savings accounts that can help you save for a down payment on a house. Sort the list by APYs, fees or opening deposits. If more than one account catches your eye, compare them side-by-side by clicking the “Compare” box beneath each option.
Saving for a home is exciting, but it takes planning, research and commitment. Finding the right account and sticking to a plan can help you stay on track. To help you find the best account to grow your money, compare top-rated savings accounts with our helpful guide.
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