What’s the best way to build a down payment for a condo fast?

By
Millicent Wong
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financial contribution

  1. property
  2. personal finance
  3. mortgages

Review your spending and find out where you can cut back on spending to reach your goal faster

Published on June 30, 2023 • Last updated 17 hours ago • 4 minutes reading time

Apartment buildings in Burnaby, BC Apartment buildings in Burnaby, BC Photo by Jason Payne/PNG

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By Julie Cazzin starring Janet Gray

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Q: My wife Magda and I are 27 years old and planning to buy a condo for $500,000. $80,000 down payment is doable, but what’s the best way to save for it? I make $85,000 a year as a web designer and Magda makes $65,000 a year in human resources. Right now we have $10,000 in savings, but all of our personal debt has been paid off. How can we make a down payment as soon as possible to buy the condo within two to three years? — Todd R.

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FP replies:Todd, you can start by remembering a few key numbers. The minimum down payment to buy a home is 5 percent, so for a $500,000 condo that would be $25,000. Their projected $80,000 would be a 16 percent down payment on the same property.

However, if you’re buying a home with less than 20 percent down payment, you’ll need mortgage loan insurance, which you can get through your mortgage lender. It protects your lender in case you cannot make your mortgage payments.

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Mortgage insurance is calculated on a graduated basis that decreases as the down payment increases. If the house costs more than $500,000, you must put down a minimum five percent down payment on the first $500,000 and a 10 percent down payment on the rest.

The lender pays an insurance premium for mortgage loan insurance, calculated as a percentage of the mortgage and based on the amount of your down payment. Your lender will likely pass these costs on to you, which you can pay as a lump sum or add to your mortgage and include in your payments. Most buyers choose to add it to their mortgage.

Lenders use two metrics to calculate a home’s affordability. As a good rule of thumb, total monthly housing expenses — including principal, interest, property taxes, heating plus 50 percent of applicable condo fees — should not exceed 32 percent of your gross household income. This is known as the Gross Debt Service Ratio (GDS).

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In your case, your gross household income is $150,000, so your total monthly housing expenses shouldn’t exceed $48,000 — or $4,000 per month. You must also allow for 1.5 to 4 percent of the purchase price for expenses such as legal fees, land transfer tax, if applicable, and GST and PST, if applicable.

I recommend speaking to a mortgage lender or broker as soon as possible to find out what mortgage amount you pre-qualify for. This will give you a good idea of ​​what you can afford, as well as a more accurate amount of down payment required and a rough estimate of monthly mortgage payments.

Now let’s talk about how to boost your savings to prepare for the down payment. With your current income after income taxes, you’re left with about $120,000 per year or $10,000 per month for all expenses. If you could save $3,000 monthly for 24 months, you would have $72,000. Alternatively, $2,000 per month for 36 months would achieve the same goal. You’ve already saved $10,000 so you’ve reached your $80,000 down payment goal.

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Review your spending and find out where you can cut back on spending to reach your goal faster. You can choose to eat out less, shop around, skip vacations, or cut back on small items like clothes, shoes, and gifts. And save the down payment in a high-yield savings account.

You can also learn about the savings programs that are available to you when you are buying a home for the first time. One thing to consider is the appeal to first-time homebuyers. It helps qualified first-time homebuyers reduce their monthly mortgage payments without increasing their financial burden.

This is a shared-equity mortgage with the Canadian government that offers: five percent or 10 percent for a first-time buyer’s purchase of a new-build home; five percent for the purchase of an (existing) resale home by a first-time buyer; or five percent for the first-time buyer of a new or resold mobile or prefab home

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The shared-equity component of the stimulus means that the government participates in both the upward and downward trend in property values, up to a maximum gain or loss of eight percent per annum (undated) of the stimulus amount from Date of prepayment the time of repayment.

The homebuyer must repay the premium after 25 years or when the property is sold, whichever comes first. The homebuyer can also repay the subsidy in full at any time without a prepayment penalty. Other savings programs include:

The First Home Buyer Tax Credit allows eligible homebuyers to claim a $10,000 non-refundable income tax credit. This could result in tax savings of up to $1,500 in the year you apply. You can split the amount with your spouse or domestic partner, but your total claims cannot exceed $10,000.

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The Home Buyers’ Plan allows you to withdraw up to $35,000 tax-free from your registered retirement plan. You must repay the amount within 15 years.

The First Home Savings Account (FHSA) is a registered account for first-time home buyers that allows them to save up to $8,000 per year with a maximum contribution limit of $40,000. Contributions to an FHSA are tax deductible and income and gains within an FHSA and withdrawals are tax free. Check with your financial institution for more details on your eligibility.

Janet Gray is a Certified Consulting-only Financial Planner at Money Coaches Canada in Ottawa

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