If you’re in the market to buy your first home, the first step is saving enough for a down payment. Here’s what you need to know.
What is a down payment
A down payment is the amount of money you put towards the purchase of a home that comes out of your own savings. Your mortgage loan will cover the rest of the price of the home.
Your down payment can be as little as 5%. Of course, if you can afford to put down more, even better. The higher your down payment, the less you’ll have to borrow, which means less of your income will have to go towards mortgage payments each month.
NOTE: If your down payment is less than 20% of the purchase price, you’ll need to insure it with mortgage default insurance. Your mortgage provider has access to mortgage insurers in Canada and will apply the appropriate premiums, based on the amount of the down payment.
Deposit vs. down payment
A deposit is simply a portion of the down payment that is included with the Offer to Purchase as a sign of good faith. You do not need to save a separate amount for a deposit – it simply comes out of your down payment. The deposit is given to your real estate agent’s brokerage during the negotiation of the purchase of the property. If your offer is accepted, the money is deposited and held “in trust” until the deal closes, at which point the deposit amount is deducted from your down payment.
How to save for a down payment
The sooner you can start saving for a down payment, and the more you can add to your savings, the better. Let’s take a look at the different ways you can save for a down payment.
Personal savings and assets
Even small amounts here and there add up: savings accounts, dividends, a savings bond that’s matured, a holiday bonus from work or an income tax refund are all great ways to pad your down payment savings.
If you have a Registered Retirement Savings Plan (RRSP), you can withdraw from it to buy or build your first home under the Canada Revenue Agency (CRA) Home Buyers’ Plan (HBP). You and your spouse or common-law partner are each allowed to withdraw up to $25,000 tax-free from your RRSP. The withdrawal is paid back in equal installments over 15 years, beginning the second year after the withdrawal. You’ll be notified by the CRA when you need to begin repayments.
If you’re fortunate enough to receive assistance from parents or other relatives, that can be a great boost. Money provided in the form of a gift or an early inheritance can be used towards your down payment, provided it doesn’t have to be paid back. Your lender will request written confirmation if this is your source of down payment including details of the family member providing the gift.
Automatic Savings Plan
If you’re still a few years away from buying a home, it’s a good idea to open a dedicated savings account strictly for your down payment. Even better, start a Continuous Savings Plan, where you arrange for a certain amount of money to be automatically withdrawn from your chequing account and deposited into a savings account on a regular basis.
Tax-Free Savings Account
In a TFSA, there is no tax on annual earnings and no tax on withdrawal. You can contribute up to $5,500 a year, and if you contribute less than this, you can carry forward any unused contribution room in case you want to contribute more next year.
Savings Tip: Let’s say you pay $800 a month in rent, and your anticipated mortgage will be $1,200. Why not put the $400 difference into savings? In just one year, you’ll have $4,800 (plus interest) to use towards your down payment.
Download BMO’s Down Payment Worksheet to help you identify possible sources that can contribute to your down payment.
How BMO Can Help
BMO has everything you need to bring you closer to achieving your down payment goals, including savings plans, investment solutions, information about the Home Buyers Plan program and expert advice and guidance.
The next step
Connect with a BMO mortgage specialist today. They’ll help you make the right decisions based on your needs and lifestyle so you can get into the home you want.