Saving a Downpayment
Posted by Gail | Filed under Home Buying
There’s been a lot of brouhaha about the new mortgage rules that came into effect recently. The maximum amortization for a CMHC-insured mortgage is now 25 years, back to where it was before the government started diddling with the rules so it could use housing to push the economy. That means mortgage payments are going to go up.
You can still get a 30- or 35-year amortization if you have 20% to put down on a home. I’ve never been a fan of amortizations over 25 years because of the whopping amount of interest you’ll pay. At just 5%, chopping your amortization from 30 to 25 years will save you over $66,000 in interest on a $376,000 home, which is the average price of a home in Canada.
I am a huge fan of the 20% down mortgage so you can totally avoid the extra costs associated with CMHC insurance. If you only have 5% to put down on a home, you’ll have to pay a premium of 2.75% on the entire mortgage amount. So on an average home purchased with just 5% down, you’re looking at a premium of almost $9,000.
Trying to figure out how to save a downpayment for a home. Hey, it’s like saving for anything else.
1. First you set the goal for how much you want to have saved.
2. Then you divide how much you want to have by the amount of time (months) that you have.
So if you want to buy a $350,000 house and you want to put 20% down (which you should), you’d need to save $70,000. That part is easy.
If you’re planning to buy your home in three years, you have 36 months to save. So you divide your $70,000 goal by 36 and you come up with $1,944 a month. That’s how much you have to save every month to meet your goal.
Impossible! There’s no frackin’ way you can sock away $1,944 a month. Well, you have three choices:
1. You can extend the amount of time you’re planning to save. Saving for five years instead of three means you only have to sock away about $1167 a month. (I know I’m not including anything for return on your savings here, but it makes this example a lot easier.)
2. You can reduce the amount you have to save. Buy a cheaper home and you’ll need a smaller downpayment.
3. You can cut expenses and find more money – or get another job – so that you have the money to sock away.
Once you’ve decided how much you’re going to save, set up a high-interest savings account (don’t settle for a piddley-assed account that pays next to nothing) and have the money automatically deducted from your primary account and moved to this savings plan so you aren’t tempted to spend the money. That’s the pay-yourself-first way.
I’ve long said that if you can’t come up with the downpayment for a home you’re likely trying to get into a home too soon, or into too much home for your wallet. Home ownership is a big frickin’ deal. It’s a huge responsibility. And it comes with lots’nlotsa reasons to spend money, beyond just the mortgage payments. If you don’t have the wherewithal to save the downpayment, you probably shouldn’t be buying.