Saving up for a down payment is the first step in achieving your dream of home ownership. But depending on the market where you want to live, it can also be the most challenging.
For example, homes for sale in Toronto cost an average of around $800,000 (and closer to $1.3-million for detached options in some neighbourhoods). Given that the minimum down payment amount in Canada is 5% for the first $500,000 of a home’s purchase price, and 7.5% for the remainder up to $1 million (homes priced above this mark require a minimum 20% down), you’d potentially need to save $40,000 just to break into that city’s market. As well, paying less than 20% down requires the borrower to take out mortgage default insurance from the CMHC or private insurer, the premiums of which are rolled up into monthly mortgage payments.
Saving a Down Payment in One of Canada’s Largest Cities
On the other hand, in these high-priced cities housing prices are rising so fast every year that if you don’t jump in with 5% down you may soon be priced out. Home prices have well outpaced household incomes, meaning the mortgage many prospective borrowers would qualify for would fall far short, even with a 20% down payment – they’d theoretically need to put down 50 – 70% of the purchase price in order to close the deal.
This can make the necessary down payment to afford a home in Canada’s largest cities insurmountable – It’s no secret that Toronto real estate prices feel out of reach for most Canadians. There, households making the median income of $78,373 will need to pony up a 63% down payment to afford the mortgage payments, on an average priced house, according to Zoocasa. Meanwhile, in Vancouver, where the median household income is $72,662, residents would need to stash 76% of the average home price as a down payment to make the monthly mortgage payments affordable.
Luckily, there are plenty of smaller urban centres in Canada which are less expensive — and even in Toronto and Vancouver there’s the option into buying cheaper property types, like condos.
How to Get Started Saving for a Home Down Payment
The first step to saving up for a down payment is to figure out your expenses. That includes current rent costs, food, insurance, gym, car payments, gifts, debt payments, retirement savings etc., After you’ve listed all your expenses and subtracted it from your income, look at what's left over. If there’s nothing left over then you need to figure out a way to cut your expenses or make more money. But if there is a sum left over at the end of the month then that’s good news — this is the money you can use to save for a down payment.
A good figure to aim for is 20% of your take-home pay. If you manage to stash that away every single month, you should be well on your way to a down payment. To top off these funds, consider getting a part-time job or slashing a fixed expense. Often moving to a cheaper apartment, or selling your car can achieve more in one go then making smaller changes like bringing your lunch to work every day.
Create a Dedicated Savings Plan
To keep yourself on track, create a special savings account and nickname it “down payment” in your online banking platform. Then, create an automatic transfer every month on your payday to this account, to remove the temptation of spending it. If you save $500 a month, in just five years you’ll have $30,000 — enough for a down payment in many cities across Canada, such as Calgary, Edmonton, Saskatoon, Halifax and Regina. If you manage to save $1,500 a month you’ll have $90,000 in five years — proving that money adds up fast. Just seeing your funds accumulate can encourage you to find even more ways to save.
Whatever you do, don’t try to invest in the stock market to grow your money — it’s too easy to lose it all in a short-time frame. Stick to safer investments like GICs, high-interest savings accounts and short-term bonds.
And remember — while it may seem overwhelming, saving up for a down payment simply comes down to basic math and will happen with time and determination.
Find out what you can afford
Once you have saved for a down payment, it is a great time to figure out exactly what you can afford. The best way to do that is to work with a Mortgage Advisor who can provide you with a full overview of how your down payment, salary, debts and other factors contribute to your affordability. Having a full picture of what you can afford will enable you to go into the marketplace and buy with confidence. To find out what you can afford, you can simply apply in 5 minutes to our Homewise online application, then one of our Advisors will be able to provide you a full overview of affordability and mortgage options from there!
Zoocasa is a full-service brokerage that offers advanced online search tools to empower Canadians with the data and expertise they need to make more successful real estate decisions. View real estate listings at zoocasa.com or download our free iOS app