The Best and Worst Places For Your House Down Payment Savings
When it comes to home ownership, exploring your favourite neighbourhood, visiting properties or imagining renovating a property are the fun parts. Working out how much for a down payment on a house and then finding a good mortgage deal can be tricky and will require meticulous preparation. Whether or not you already have some savings to put towards a down payment, you’ll need to look carefully at your finances and decide how much down payment for a house you’re ready to commit to.
- Saving up for a down payment is a major part of the home buying process. But you need to decide where you’ll keep your savings.
- Spend some time shopping around so you can make an informed decision and ensure your hard-earned money is in a safe place.
- Start saving as early as possible by setting a budget and sticking to it. Be creative when it comes to finding new ways to save more money every month.
How much do you need for a house down payment?
Purchasing a home is probably one of the most important financial decisions you’ll ever have to make. But your financial engagement doesn’t start when you sign your mortgage contract, it really starts when you begin to save for your house down payment.
Typically down payment represents 5% to 20% of the property value and your exact down payment on a house will be calculated on a per case basis depending on the price of the property you want to purchase.
What is a minimum house down payment?
The minimum amount for the down payment for properties under $500,000 is 5% of the purchasing price.
The minimum amount for properties valued between $500,000 and $999,999 is calculated in two parts: 5% for the first $500,000 and 10% for the portion above $500,000.
All properties above $1 million will require you to hand over a 20% minimum down payment for a house to your financial institution when signing a mortgage agreement.
Down payment savings: Where should you keep it?
Since you’ll need to save tens of thousands of dollars for a down payment on a house over a period of time, you’ll want to make sure your money is in a safe place and why not grow while you’re building your nest egg. Let’s look at four places where you should keep your money.
The easiest place for homebuyers to keep their down payment is to open a savings account with their usual banking institution. As an existing customer, you’ll be able to open it and transfer money into it very quickly and easily. You may not earn a lot from your savings account but your money will be safe and readily accessible if necessary.
High-Yield Savings Account
Another option is to open a high interest savings account, also known as HISA. Most traditional banking institutions will offer HISAs but you’ll probably get better interest rates from online banks. As the Bank of Canada successively raised their interest rates in 2022 and 2023, with an HISA account you can get up to 5% interest rates, which means that you’ll reach your goal faster. You’ll want to check any special requirements or fees when comparing high-yield savings accounts available on the market.
First-Time Homebuyers Savings Account
If you meet the requirements for this government type of account, you’ll be able to save a total of $40,000 on a tax-free basis, with an annual contribution limit of $8,000. It allows you to build up your savings without paying any income tax on it, unlike other types of savings accounts.
Certificates of deposit
The final option we’d like to explore is the certificate of deposit. Similar to guaranteed investment certificates (GICs), certificates of deposit are secured investments backed up by the Canadian government. It means that your money is protected and that you’ll get your initial investment back after the set duration plus the guaranteed interest earned. The longer the term, the more competitive the interest will be. Keep in mind that, unlike regular savings accounts, you’ll get a penalty if you want to retrieve the money before the end of the investment period.
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Down payment savings: Where should you not keep the money?
You may find yourself tempted by the promise of higher returns if you place your money in an investment account with a broker but it will come with higher risks.
Unless you’re experienced and comfortable with higher risks, then you should not keep your downpayment money in an investment account. Market volatility is real and you could see your savings shrink over a quick period of time as there’s no guarantee that your money will still be there in the short term. If you’re planning on purchasing a property in the next five years, you should certainly avoid any investment account and choose one of the savings accounts mentioned earlier in this article.
Get started saving for a down payment
Once you’ve decided that you’re ready to start saving for a downpayment, there are a number of things you can do to meet your goal.
The first thing is to pay off your debts and cut any unnecessary spending. Start by creating a list of all your weekly spending and see where you can make some cuts. Then, set a weekly or monthly budget and commit to sticking to it. Set up automatic transfers to your savings account and also send any money left over every week.
Another great way to save for a downpayment on house is to start a side hustle or get a second job for a limited period to help you kickstart your savings. Pick something that you would enjoy doing after your day job and won’t get bored after a few weeks.
If getting a second job or taking some freelancing jobs isn’t your cup of tea, you could consider getting a roommate or finding a cheaper rent in another part of town. Either way, you’d be spending way less on rent and you could use the leftover money to grow your down payment. Finally, another great way to save money for a down payment on a house is to keep all your bonuses and salary raises for the upcoming months and transfer each time to your savings account.
Here are the answers to some of the frequently asked questions about the best and worst places for your house down payment savings.
What is a down payment?
A down payment is the amount of money requested by the bank that you’ll need to contribute upfront when contracting a mortgage. The amount varies between 5% to 20% of the price of the property.
Can I get a home loan with no down payment?
If you have an excellent credit score and meet the requirements for specific programs such as the Home Buyers’ Plan (HBP), you can potentially get a home loan with no down payment but this isn’t the norm so be prepared to put down at least 5% of the property value towards a down payment.
How much do you need to put down?
There’s a minimum required that will depend on the value of the property you wish to purchase. For instance, the down payment required for properties under $500,000 is 5%. For properties valued between $500,000 and $999,999, banks will ask for 5% of the first $500,000 and 10% of the portion above. For properties valued over $1 million, you’ll need to put down 20% of the value of the house in order to get a mortgage.
What’s the best way to save for a house down payment?
The best way to save for a house down payment is to pay your debt first and then set a weekly budget. You’ll need to consider saving for 2 to 3 years in order to have enough money to cover the down payment. Of course the more expensive the house, the more money you’ll need to save to become a homeowner.
How do I store my down payment savings?
There are various options when it comes to storing your down payment savings. The easiest and quickest way to store your savings is by opening a regular savings account with your bank. Start transferring money into it as soon as possible. Your money will be safe and you’ll start earning interest on the money in your account. There are other types of savings accounts that can yield higher interest so make sure to shop around and consult with various financial institutions offline and online.
How do I know if my money is safe?
If you want to make sure your money is safe, choose government-backed accounts such as savings accounts, HISAs, first-time homebuyers savings accounts or certificates of deposit.
In conclusion, when it comes to saving for a house down payment, there are a number of options available to you. Depending on your financial situation and goals, you may want to consider saving in a high-yield savings account, regular saving account, certificate of deposit, or even better the tax-free First-Time Homebuyers Savings Account. Ultimately, the best option for you will depend on the amount of money you currently have, your saving propensity, and the amount of time you are willing to wait for your funds to grow. In the meantime, speak to one of our mortgage experts and get the best rate today.
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