Saving for a Down Payment and New Mortgage Rules

Posted by on Wednesday, January 4th, 2017 at 2:07pm.

 

Believe it or not, saving for a down payment can be done.   It might be the most ambitious thing you’ve ever done but it’s not impossible.  With the new rules about mortgages now in affect in our country, the bar has been raised even higher for new home buyers who haven’t been able to scrape together a minimum 20% down payment.

Check out these tips on how you might possibly come up with the cash you need even with these new mortgage rules and their challenges.

Goal Setting

If will be most helpful to establish the precise amount you need.  The minimum is still 5% of the purchase price.  The only thing that’s changed is the interest rate at which you can quality for which as been set above the actual interest rate you’ll pay.  You’ll need to set a dollar value for the home you believe you can quality for/afford, then decide if you want to go for the minimum of 5% or if you think you can put together 20% so that qualifying for a mortgage loan will be easier.  Do your homework and engage the services of a professional real estate agent to help determine your budget, the type of home you want and a neighbourhood in which you can find the best home for your budget.  Then, and only then, will you know how much you need to save for.  Use an online mortgage calculator to help in this estimate.

Keep the CMHC Stress Test in Mind

As mentioned, the new mortgage rules have been put in place by Canada Mortgage and Housing to assist Canadians with their home loan by preparing them for rising mortgage rates.  Therefore, anyone putting less than 20% down will have to qualify at the Bank of Canada’s posted rate.  Currently, it’s 4.64%.  So, while you will likely find a five-year fixed-rate of half that amount, which you may actually be paying, you must qualify at 4.64%.   You can see why saving 20% of your purchase price is to your advantage.  You will able to quality and afford a much high priced property.  However, while you’re saving your 20% the price of a new home could rise setting the bar even higher.  If you just want to get your foot in the door and 5% is achievable you may want to lower your expectations on what an entry level home looks like for you.  From this point, give yourself a deadline, i.e., if you save X dollars every payday I will have my 5% down payment in 18 months.  A goal, and a deadline for your goal.   Make yourself a spread sheet.  Saving is just the opposite process of paying down debt.  Loan payment spreadsheets can help you determine loan payments, interest calculations and provide some context as to when you can have your loan paid off.   If you can find money to pay back a loan, you can find money to pay your savings account.

Do You Have Other Resources?

Could you find some opportunities for lump-sum contributions, either one-time lump-sums or extra monthly contributions to help shorten up your savings timeline?   That could be:

  • A loan from the Bank of Mom & Dad
  • Refund from income tax
  • Other savings instruments
  • Cashing in RSPs or selling assets such as a vehicle

Otherwise, depending on how motivated you are and whether your goal is that 20% for a down payment, you might have to alter your spending on everything including any rent you are currently paying.  Short term pain, long term gain.

Watch Your Savings Grow

You’ve got your target, you’ve got your spread sheet set up and the contributions to your home ownership account are starting to pile up.  Hopefully with every dollar that goes in your motivation and desire grows – like a train that finally gets rolling down the track on the way to its final destination.   Staying on track is the hard part.  Keep your credit in tact, don’t max out your cards because when it comes time to sit down with the lender you need to be squeaky clean.   Think of it this way.  Imagine that just 5 short years ago, you decided to save $200 a month.  By now you’d have $12,000 plus interest, no matter how modest.   That’s enough for a 5% down payment on two-bedroom two-bathroom condo in a nice neighbourhood.

Start today!

 

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