Saving for a Down Payment shouldn’t
get you down
In an age when real estate prices seem to be escalating faster than a first-time buyer can save, and bidding wars can push a sale price well beyond list, it’s a frustrating time for new buyers to enter the housing market.
It may be tempting to leap in with a low down payment. But buying a home when you’re ill-prepared is a financial mistake that can burden you for decades and add tens of thousands of dollars to the cost of a house.
The High Price of High-Ratio Mortgages
While Creative Arts, like most financial institutions, will allow first-time buyers to take out a mortgage with a down payment of less than 20 percent (as a percentage of the purchase price of the house), these “high-ratio mortgages” require mortgage default insurance which can add 3 percent or more to your loan amount. And once you factor in the other costs of purchasing, such as land transfer tax, legal fees, appraiser’s fees, inspection fees and HST on some new homes, you may have dug yourself a very deep hole indeed. In the long run, it may make more financial sense to tighten your belt now, save aggressively, and buy a starter home with 20 percent down than to aim at getting more house with less money.
How to save depends on when you plan to buy. If you’re looking to get into the market in the next two years, the safest investment vehicles are lower-risk products that provide modest, guaranteed returns for your hard-earned dollars, like a Creative Arts TFSA or GIC. The motto for short-term savers is “slow and steady wins the race.” We can make it easier for you by taking a fixed amount of your income and depositing it into one of these investment vehicles automatically. The deduction from your cash flow will be relatively painless but the progress you’ll see toward your savings goal will be exhilarating.
Those who plan to buy a home farther into the future – at least five years from now – have the same advantage as any long-term investor: time. They can take a bit more risk, and reap greater rewards, because they can park their money for a longer term. Higher-risk investments, in mutual funds or the stock market for example, may lose money (on paper) over a year or even two, but they can appreciate handsomely over five years for patient, would-be homeowners who don’t mind renting for the time being.
The RRSP Advantage
Everyone can take advantage of the federal Home Buyer’s Plan, which allows first-time buyers to withdraw up to $20,000 from their RRSPs, tax free, to buy a home. The money needs to be repaid over a period not greater than 15 years, but given the interest savings that come from a bigger down payment, and the advantages that come with lowering your current tax payable through RRSP contributions, traveling the RRSP route to a down payment is well worth it for most first-time home buyers.
Contact Creative Arts by phone at 416-642-6749 or toll free at 877-643-3660 for advice on home buying and how to reach your savings goals.