So many homebuyers, whether they're first-time buyers or second-time buyers are trying to find ways to scratch and save up a down payment. Sometimes I know it's really difficult to save money when there are always so many other obligations to meet, however, we have eight ways that you can consider to save that down payment and we also have a totally free brochure that you can download that outlines all our suggestions.
The first way, and in my mind the number one way to find or save your down payment, is through your tfsa - your tax-free savings account. Why is this the best? Well, because you can take out as much money as you want at any time from your tfsa without paying taxes because the taxes were already paid when you put the money into the account, and any gain that was made on the funds that you invested are also tax-free! Plus, unlike an RRSP, you can remove as much of the funds as you want, there's no restriction on how much you can take out at any given time. So it's a great way to start saving some money as you go along: put it in your tfsa, let it earn money while it's in there in the form of either a capital gain or some dividends or interest, and then when you remove the money to buy your house - it's all tax-free!
Number two: Maybe you have some investments? You would have to check out and ensure you're not paying any stiff penalties to remove your funds, however if not, cash in a few investments. Maybe that Canada Savings Bond you've had since you were five years old that your parents bought for you. It can probably do a whole bunch more good as a down payment for some real estate rather than sitting there gaining very little growth.
Number three: how about a loan? Maybe a line of credit? If you're a first-time buyer this likely isn't an option for you because you still have to come up with your five or ten percent from your own sources. However, if you're looking to buy a second home, you could consult with your banker about potentially withdrawing some equity from your current home. In other words: increasing the amount owing on the current home that you own to make the money and leverage yourself to buy a second home, then the interest that you pay on the amount that you're using for your down payment is also deducted against any income that you make off the second home. Or the bank may even give you an unsecured loan or line of credit that you could use towards your down payment on your next home. It could be an option if you have good credit and a healthy history with your bank.
Number four is using your tax refund. Every now and then people actually get a tax refund! Every little bit counts towards your down payment and a tax refund is a nice tax-free way of putting a little bit more into the down payment fund. A way of creating a tax refund for yourself is by contributing to your RRSP in that given year, depending on your situation and how much tax you prepaid during the year, you could get a nice healthy tax refund which you could use directly on your down payment.
Number five then leads us right into RRSPs. One of the most common ways of finding some extra money for a down payment on your first home - and it has to be your first home - is from your registered retirement savings plan. If you have money in your RRSP, then you can borrow up to $35,000 against your RRSP account tax-free and the only stipulation is you pay it back over 15 years. It's a good way to find a down payment because you can remove the funds tax-free and the only negative as compared to say your tfsa is that you can only take out a maximum of $35,000, whereas with your tfsa you can take out as much as you want. Plus you have to pay this back.
Number six: is gifts from family. If someone is willing to gift you a down payment then the banks will acknowledge this as an acceptable source of down payment. So if you have a nice family member that's willing to give you some money - and it has to be a gift it can't be a loan that's repayable- then you could well be on your way to saving a whole down payment.
Number seven is joining with the government as part of the Canadian First Time Home Buyers Incentive. This is a plan where the government will lend you a down payment for your house of five to ten percent in return for a five to ten percent equity stake in the value of your home. So if you borrow say fifty thousand dollars for ten percent on a five hundred thousand dollar house and then that house goes up to a million dollars say in ten years then you have to repay the government back ten percent of the value when you sell or a hundred thousand dollars. It has to be paid back the sooner of when you sell the house or 25 years. This plan hasn't been as popular as I think the government thought it would be because it's kind of weird having the government as a stakeholder in your house, however it is an option if you're interested.
And last but not least number eight - this actually isn't a way necessarily to save your first down payment but it's a good way to save your second, and that is to buy a house with say four bedrooms, live in one, rent out the other three in order to 1. pay your current mortgage and 2. put money aside for a down payment on your second house. Then when you have enough money saved up buy a second house, move there on your own, leave everyone else behind to rent it and you have a nice rental property! If you're willing to do something like this it's a great way to make money. You sacrifice some privacy of course to move your real estate portfolio forward in the future.
Be sure to download our free folder called "Creative ways to find money for your down payment", and here is the link to more information on our first-time buyer's website: www.vernonfirsttimers.com, where we have even more information on all the many first-time buyer incentives that are out there.