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Saving for a down payment

Saving for a down payment on a house can seem like staring at a huge mountain you have to climb, so it's best to do like the pros and take it one step at a time.

As with most large purchases -- and this is likely the biggest you'll ever make -- start with solid research then make a plan.

"You need to sit down and ask yourself what you can really afford," says Debbie McPherson, vice president of sales and marketing with mortgage insurer Genworth Canada. "Not just in terms of the down payment, but also the other costs of closing so you don't start off in the hole."

These can range from 1.5 to 3 per cent of total mortgage principal and include such expenses as insurance, legal fees and land transfer taxes.

You also need to examine what you can afford in terms of house price and look at possible mortgage scenarios including what will happen if interest rates increase.

Staying on track
It's critical, she says, to "stay focused and stay within your means. Start with a good plan about what you can afford as a down payment, then put together a disciplined budget and stay within it."

As for the budget itself, Farhaneh Haque, director of mortgage advice for TD Canada Trust, says that a good place to start is "trimming the fat from your current spending. Often it's the little things such as coffee shop purchases that really add up."

Haque says she advises starting small. "We always recommend saving as much as possible, but remembering that even savings that are small and incremental will grow over time."

You should open a separate account so you can see how well you're doing toward meeting your goal -- and you're not tempted to dip into it for other purchases.

The goal of home ownership is a powerful motivator to stick with your savings plan and budget, she says, and automatic deductions from your paycheque are the best way to contribute: "It's a matter of not missing what you don't have."

How much to save
Haque says that as for how much you need to save, the minimum is 5 per cent. "What I say to clients is 'If you're comfortable reaching 5 per cent, can you push a little harder and get to 7 per cent. Then can you push a little harder to 10 per cent.'"

In a recent TD Canada Trust survey of first-time homebuyers, the top three lessons buyers said they'd learned are:

  • Be more thorough when budgeting and accounting for all the costs of home ownership
  • Make a bigger down payment
  • Buy a home sooner
(continued on next page)
-- Posted September 5, 2012
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