Saving for a Down Payment

How Much Money do You Need to Make a Down Payment?

You can buy a house for as little as 5% down, but remember that the larger the down payment, the easier the other expenses will be to manage. We encourage you to calculate what you can afford to work out what’s best for you. Once you’re ready to put an offer on a property you’ll need part of your down payment as a deposit, so remember to keep some funds easily available and accessible.

Will the Size of Your Down Payment Affect the Type of Mortgage You Get?

If you make a down payment of 25% or more, of the lending value, you may qualify for a conventional mortgage. If you are making a down payment of less than 25%, the mortgage must be insured. The insurance protects the lender against borrower default. Your lender will arrange for mortgage default insurance.

How Will You Save Enough Money for a Down Payment?

Saving enough money to buy a home can seem overwhelming, but you may be able to get your down payment faster with a savings or investment plan.

  1. Personal Bank Accounts
    Open a bank account and set aside money specifically for your new home. Make a habit of paying into this account on a regular basis, just as you pay your monthly bills. Remember that you will need cash (or a certified cheque) for the down payment and the closing costs associated with buying a home.
  2. Investments
    As the money in your bank account grows, or if you already have money set aside, you may want to invest.
  3. Using RRSPs towards your Down Payment
    Registered Retirement Savings Plans are a good way to secure your financial future while enjoying tax benefits today. You may also be able to use your RRSP savings towards the purchase of a home. The current Home Buyers’ Plan permits the first-time homebuyer to withdraw up to $20,000 from their RRSP to buy or build a home. The amount withdrawn is treated as a loan and must be repaid within a 15-year period, commencing in the third year after the withdrawal.

Additional information is available from Genworth Financial Canada (formerly GE Mortgage Insurance Canada) athttp://www.genworth.ca.

She Did it Our Way

Joanna Pachner, Financial Post Business

Published: November 06, 2007 (But still very relevant)

Twenty years ago, Heather Zorzini was an anonymous, 32-year-old Family Finance subject. Today, thanks to our advice – and her own sound planning – she’s one happy retiree

Heather Zorzini didn’t want to wait for Freedom 55. At 52, she’s stowed away her carry-on luggage and Air Canada flight attendant’s uniform for good. “Today is my first day of retirement,” she says with a satisfied laugh. It’s the evening of Oct. 1, and she’s just returned from a weekend renovating and enjoying the farmhouse she and her husband bought in Ontario’s Prince Edward County. She also owns property in the Caribbean, has more than $70,000 in RRSPs, other investments, and now receives the maximum company pension she can after 30 years of work.

Zorzini has managed so well because she’s been exceptionally careful with her finances, and because she got some good advice early on. Twenty years ago this October, the then-single Torontonian was anonymously profiled in The Financial Post Moneywise Magazine’s “Personal Accounts” column – the forerunner of our current “Family Finance” column. At 32, she already owned a home (a tiny wreck in downtown Toronto she was gradually fixing up), was well on her way to retiring her mortgage, and professed to hate debt and enjoy balancing her chequebook. “I love it because you can actually see progress,” she told us at the time.

And progress she has made. Two financial planners who analyzed her finances and goals at that time gave Zorzini a nine-point action plan. She applied almost all of it, but found particular benefit in three of their recommendations:

1. Get into real estate. She bought her original fixer-upper for $77,000, then sold it 10 years later for more than $230,000, just as the market tumbled into the early-’90s recession. Not only did she find she had a flair for renovations, but used the proceeds as a down payment on a larger home in a leafy Toronto suburb. When that house was eventually sold, she reinvested the money in more real estate, as well as some RRSPs, stocks and bonds. “That first house has been a really good foundation for everything else that I’ve done since,” she says. Today, she owns property in Tobago – a vacant one-acre lot that she bought in the early ’90s and has watched slowly rise in value. She also hopes to add another house in Prince Edward County. Her one regret is missing out on some opportunities she considered in the early days, such as a condo in Miami’s South Beach and three cottages on Georgian Bay. “If I’d bought them, I could have retired five years ago,” she says.

2. Get a marriage contract. A year after the FP article appeared, Zorzini married a man who moved into her home. To protect her asset from becoming communal property, she had a lawyer friend draft a contract. When, after 10 years, the marriage broke up, the contract proved bulletproof, says Zorzini. “When we divorced, his lawyer told him, ‘Don’t even bother to battle with this woman.'” The couple ended up splitting the divorce costs, and she even got $50 a month in cat support. “This was the best piece of advice I’ve ever been given,” she says. “It saved me a whole pile of money and a whole pile of aggravation.” Now remarried, Zorzini has no contract with her second husband. Why? “I’m living in his house.”

3. Have some fun. In her early 30s, Zorzini budgeted carefully out of necessity. As she grew more financially secure, she has splurged a bit. She has travelled widely, from Morocco and Turkey to Chile and Japan, and she and her husband have done some upgrades to their home. Still, she’s hardly become a spendthrift. “We’re frugal, and try to get value for everything we buy.”

Zorzini’s plans for retirement blend many of the things she’s long enjoyed: She’s writing travel articles that focus on notable homes, and plans to continue investing in and renovating properties. When her colleagues marvel at her ability to retire so early, she points out that she’d originally intended to do so after 25 years, so she’s actually five years behind schedule. “Some people plan more for vacations than they do for retirement,” she says. “I have always kept my eye on the future. And the advice I got has made it easier for me to work toward my goal.”

5 Reasons continued

Capital appreciation applies just as well to single-family detached houses as to condominium units. The ‘land’ of a condominium unit is the strata lot, so that if you so happen to live – say – on the twenty-fourth floor of a highrise tower in downtown like I do, your condo unit still sits on a strata lot. And on the twenty-fourth floor your strata lot does appreciate while the structure of your condo is subject to functional depreciation.

RENT MATCHES INFLATION

Inflation, as it is widely known, is defined as the loss of purchasing power of money. Inflation is due to a variety of economic factors and political choices but no matter what our governments do – or fail to do – at any given time, it all boils down to increased borrowing and increased monetary supply and availability which, in turn, decreases the purchasing power of money. In layman’s terminology what this means is that it will cost tomorrow, for the sake of an example, ten cents more to buy a certain good in the economic basket than it does today. You still end up buying the same good, but you pay more for it.

These days inflation is not a problem in North America – at least not the way it used to be. But every year our currencies still lose value, albeit minimally: two percent in the United States and almost three percent in Canada on the respective currencies as of last year’s count. Rent typically increase at the rate of inflation, so that a tenant in Vancouver that was paying – say – CAD $1,000 per month in 2005 can expect to pay CAD $1,030 approximately in 2006. Rent paid is, in essence, the cost of just another service this time offered by a Landlord , and once the rent money is into the Landlord’s pockets it can never be recovered.

MORTGAGE CAPITAL AND INTEREST PAYMENTS

Naturally when you go buy a house and contract out a mortgage with a lender, you will have to pay interest because you are using someone else’s money. But every time you make your monthly mortgage payment you also pay back some of this money. This builds up your equity which then grows over time. Equity growth is typically more evident in the United States where mortgages are amortized in a straight line over the term of the loan. In Canada lenders are more complicated and apply a process known in the business as compound interest, i.e. interest on the interest. Still at about halfway through over a typical 25-year amortization span, in Canada too principal repayment takes over interest payment, so that equity growth builds up faster.

CAPITAL GAINS

Capital gains are not to be confused with capital appreciation, although they are a consequence of it. Simply put, there is a realized capital gain when the amount of money you sell your property for minus the price you paid for it is positive. The real estate market may fluctuate, but it is a matter of fact that house prices increase over time. Economic capital gains are adjusted for inflation and expressed in Dollar/Year. For instance, here in Vancouver a single-family detached home that sold in 1975 for CAD $57,000 in 1975 Dollars may very well sell today for CAD $525,000 in 2005 Dollars.

On a cursory count, CAD $57,000 in 1975 are equivalent to approximately CAD $80,000 in 2005, so that your economic capital gains from the time you bought the house in 1975 to the time you sell it in 2005 are the difference between CAD $525,000 and CAD $80,000 expressed in 2005 Dollars, or a whopping $445,000. You can easily determine from this example how much real estate has appreciated over time in my hometown, with the appreciation already adjusted for inflation.

PRIVACY AND CONTROL

In a Tenancy Agreement you are entitled to privacy typically for the period you pay rent for, subject to the Landlord’s rights. These rights include the Landlord’s right to inspect the tenanted premises on reasonable notice, the Landlord’s right to sell the tenanted premises, the Landlord’s right to repair and ameliorate and so forth. In essence, just because you pay rent that does not make you the owner. The rent simply guarantees your exclusive use of the premises for a certain period of time, again subject to the Landlord’s rights.

Likewise, in most cases you as the Tenant have no control over items such as remodeling, repainting and redecorating. It is true that in most jurisdictions Landlords have a duty to rent premises reasonably fit for human habitation, but then it is also true that many Landlords do not go one inch over and above the minimum threshold required by law. But from an economist point of view, if you spend money you should be entitled to reap the rewards – something you entirely miss out in a tenancy situation.

Too many tenants and renters think that owning a property is a farfetched goal. Yet, now more than ever it is the best time for them to take the plunge and buy real estate. Mortgage rates are still historically low and the buying process is easier than ever.

Are you missing out, if you rent? You bet.

Luigi Frascati is a Real Estate Agent based in Vancouver, British Columbia.

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