How Much is Enough to Save for a Mortgage?

When should you start to save for a mortgage?

The challenge today is saving for a sizable deposit for a down payment and closing costs. Credit scores are critical, but so are income and assets when you are applying for a mortgage.

Homebuyers are required to have at least a 5% deposit of the home purchase price, although if you don’t want to purchase default insurance, then you’ll need at least 20% for a conventional mortgage.

There are several benefits to waiting until you have enough for a down payment of 20% or more before you purchase a home.

1. Reduced mortgage payments
   The more you put down on your home upfront, the smaller your mortgage payments will be. That could help your monthly budget. More importantly, you could save thousands of dollars in interest in the long run. For example, on a 30-year mortgage at 5% interest, putting an extra $10,000 into the down payment will save you $9,325 in interest payments over the life of the loan.

2. Lower interest rate
   Lenders often offer better interest rates to borrowers with a lower loan-to-value ratio or the percentage of the purchase price that you’re financing. An increase in your down payment lowers the ratio and reduces the risk to the lender that you will be unable to pay your full loan balance. Lower interest rates can also save you money over the life of the mortgage.

3. No mortgage-insurance fees
   If you want to contribute a smaller down payment than the traditional 20%, most lenders require that you take out mortgage insurance. This insurance protects the lender in case you cannot pay your mortgage.

4. Instant Equity Building
   A significant down payment builds instant equity in your home. A 20%t down payment immediately puts equity into a property when you purchase it.

So, if you’re a first-time home buyer, how do you save for a down payment?

As a first-time buyer, you’ve got other things to consider, including:

• Your rental costs. (Are they higher or lower than your potential ownership costs?)

• Alternative uses for your down payment money. (Can you get a better return by investing down payment funds elsewhere?)

• The size of your emergency fund. (Homeownership comes with a laundry list of unexpected expenses.)

• Your economic stability and future earning power.

There are several ways to piece together a bigger down payment. You can:

• Cut your spending and reduce your credit card limits. You might want to consider asking your credit card company to reduce your overall limit as this will help boost the overall amount lenders will be willing to offer you.

• Get rid of debt! Carrying high levels of debt will reduce the overall amount lenders will be willing to offer you for a mortgage. Demonstrate to the lenders that you have responsibly made repayments on your credit cards.

• Sell old, unwanted items.

• Tap into the bank of mom and dad. Gifts from parents get a lot of young people started as homeowners.

• Borrow from your RRSP under the Home Buyers’ Plan (HBP).

• Apply tax refunds and bonuses.

• Get rid of one car in a two-car household.

• Postpone a vacation for 18 months or more.

• Get a second job. Working a couple of nights a week at a part-time job only puts extra cash in your account. It also decreases time and opportunity for you to go out and spend unnecessary money.

• Use municipal first-time homebuyer grants when applicable (like this one in Saskatoon).

There are ways we can help you plan your down payment. Give us a call today at (306) 244-7755 or visit mortgagenowinc.ca

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