How to Get Started
To get started, it is important to figure out how much you can afford to borrow given budgetary constraints. A mortgage calculator is a useful tool to determine this. Keep in mind that monthly mortgage payments should not exceed 30% of your monthly income. Once you have a value for the mortgage principal in mind, it will be up to you to determine the percentage of down payment and the length of the term based on what is feasible for you. By example, assuming an average first-time buyer purchase price of $300,000 and a minimum 5% down payment, this means you would need to save at least $15,000 plus closing costs. Over a 4 or 5 year period, this means saving roughly $3000 to $3750 per year, which translate to about $250 to $310 a month. This can seem quite daunting, but there are many ways to make saving money easier.
Bigger Down Payment, Smaller Monthly Payments
When considering a mortgage, it is without a doubt that a larger down payment will yield many benefits. Monthly principal and interest payments will be reduced, as well as overall interest paid in the amortization period. A conventional mortgage with 20% down payment will even save the purchaser from having to pay more for default insurance, which can be 1.00% to 3.50% of the principal amount. For those unable to put down 20%, there is always the option of a high-ratio mortgage with a down payment as little as 5%, but this will require the purchaser to allocate more of their monthly budget to mortgage payments.
Budgeting will be the biggest factor in saving up for a down payment. First and foremost, increasing monthly income is a good place to start. It is not unreasonable to work multiple jobs if it is feasible for you. The benefit of more work is twofold: income increases proportionally while expenses may decrease due to there being less free time to spend money. Selling unused items is another way to increase income.
When it comes to expenses, seemingly small daily transactions can accumulate into large monthly expenses that are very easy to look over. A daily cup of coffee can translate to $45 to $60 per month. A workday lunch out can cost $100 to $200 per month. Commuting by mass transit can cut out a significant amount in gas and using the car less may translate into less repair costs over time. Taking the effort to buy groceries on special, and buying in bulk can also mean greater savings. If you are renting an apartment, it may be wise to move to a cheaper apartment or to take in a roommate which will immediately cut rental costs in half. Applying for tax refunds and taking advantages of any types of bonuses available to you may lead to even more savings.
There are numerous ways to increase savings, and the best way to do so is to increase income and to keep track of as many expenses as possible. From there, it is up to you to determine where these expenses can be reduced.
Buffing Up Your Savings
Now that you have increased your savings flow, there are many ways to bolster up those savings. You can earn interest on your savings by putting your money into a high-yield savings account or a secure investment such as government savings bonds. As a first time home buyer, you can also take advantage of many subsidies and incentives, such as the First Time Home Buyer’s Tax Credit (HBTC), calculated as the lowest personal income tax rate for the year multiplied by $5000. At the 2009 rate of 15%, this means a $750 credit. The Home Buyer’s Plan (HBP) allows you to take up to $25,000 from your RRSP per year, to be repaid within 15 years.
There are also many provincial incentive programs, most of which offer subsidies for retrofitting existing or new homes with energy efficient upgrades. There are even subsidies at the municipal level as well.
Remember, with the right plan and making use of all the benefits available to you, saving up for that down payment can be much simpler than it seems. While self-discipline is a must, owning your own property is a worthwhile reward.