Down Payment Basics for First-Time Buyers

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January 28, 2020

Down Payment Basics for First-Time Buyers Featured Image

Buying your first home is a huge and exciting milestone in your life. We also know it can be a big job to build yourself up to the idea of saving and sourcing information in regards to your down payment.

That’s why we’ve compiled a list of the most important down payment basics to help you out. Keep reading to learn more!

How Much Do I Need for a Down Payment?

Tips for Saving for Your Down Payment

  • Pay Off Any Debt
  • Prioritize Your Funds
  • Make a Budget
  • Use a Tax-Free Savings Account

Programs That Can Help You Out

  • The First-Time Home Buyers’ Tax Credit
  • Home Buyer’s Plan
  • First Time Homebuyer Incentive

Down Payment Basics for First-Time Buyers Budgeting ImageHow Much Do I Need for a Down Payment?

This is usually the first question new home buyers have when it comes to down payments. The exact amount will, of course, vary depending on the value of the home you’re buying,  but it’s easy to calculate.

The minimum amount you can put down is 5% of the home’s value, as long as the home costs $500,000 or less. If the cost of the home is over $500,000, the minimum you’ll need to pay is 5% on the first $500,000 and 10% on the remaining balance. So for example, if your home costs $600,000 the minimum down payment would be:

  • 5% of $500,00 = $25,000
  • 10% of $100,000 = $10,000
  • Total minimum down payment = $35,000

The good news is there are a variety of new home options available to fit every budget. Most new homes in the Edmonton area range roughly from $300-500K so you likely won’t have to worry about paying an additional down payment amount.

While it may seem tempting to put down the minimum amount possible, especially for a first-time buyer, you should be aware that there are also drawbacks to this method. If you put down less than 20%, your lender will require you to pay for mortgage insurance to protect them in case you default on the loan. This means that while you’ll pay less for your down payment upfront, your mortgage payments will be higher.

There are many online resources available to help you plan your down payment, such as down payment calculators

Down Payment Basics for First-Time Buyers Debt Image

Tips for Saving for Your Down Payment

If you don’t already have the money set aside for a down payment, there are a few things you can do to speed up the saving process. Here are a few suggestions:

Pay Off Any Debt

It’s better to start with a clean slate when making a new investment. Your first step should be paying off any credit card or student debt. For you to qualify for a mortgage and get the best rate, the less consumer debt you have, the better. 

Prioritize Your Funds

If saving for a home is a huge priority, then you need to make it your number one goal. Unless it’s on necessities, every time you’re about to spend, ask yourself “Is this more important than buying a home?”. 

For example, you can start small by asking yourself if you really need that double-double on the way to work in the morning. Or, on a larger scale, if you live close to work or have access to transit, do you really need to be driving?  The average annual cost of owning a vehicle here in Alberta can reach upwards of $9000 per year. Imagine taking that money and putting it towards the cost of a new home.  

It’s simple to make cutbacks with the right frame of mind and keeping your goal in perspective. 

Make A Budget

Have you heard of the pay yourself first concept? Essentially, the idea is to put away 10% of your income each payday.  This way, you are making it a priority to save before you spend on anything else. To cut your bills, consider a new cell phone provider or shopping at a less pricey supermarket. Check out your bank statements to see where you really spend your money. From there, you can lay out a realistic monthly budget.

Use a Tax-Free Savings Account

While you’re saving, try to put your money aside into a tax-free savings account. That way, your money can grow and you won’t have to worry about paying income tax on it as you save. There are contribution limits, however, so it’s a good idea to read up on how the TFSA program works.

Down Payment Basics for First-Time Buyers Family ImagePrograms That Can Help You Out

There are also a number of programs available to help you with your down payment, especially if you’re a first-time buyer. 

The First-Time Home Buyers’ Tax Credit – RRSP

In some cases, first-time homebuyers can get a non-refundable tax credit after qualifying for a home. This is calculated by taking the lowest personal income tax rate for the year and multiplying it by $5000. With current rates, this generally works out to a rebate of $750 and will help you recover additional expenses such as closing costs and land transfer taxes. 

Home Buyer’s Plan

The Home Buyers’ Plan is a government-issued plan that allows you to borrow up to $25,000 tax-free from your RRSPs. In order to qualify for this, you cannot have owned a home in the last 5 years. The great part about this is you have up to 15 years to pay back your RRSP loan. 

First Time Homebuyer Incentive

The First Time Homebuyer Incentive is a new government program that offers 5 or 10% of the cost of your home to put towards a downpayment as a loan. You’ll pay it back either when you sell the home, or within a 25-year window.

Be aware that if you repay the loan when you sell your home, you’ll be paying back the percentage of the value of your home, rather than the original amount. So for example, if your home costs $500,000 and you borrow 5% under this program, you’ll receive $25,000 towards your down payment. If you later sell the home for $550,000, the repayment will still be 5%, or $27,500. 

Some more unconventional ways you may want to explore are:

1) Gifted Down payments –  As a new immigrant, lenders understand that you may have down payment savings with immediate family back home. There is a gifted down payment program that some lenders provide, to make it easier for such clients.

2) Bank Loan – Some lenders will give loans for down payment (depending on your eligibility) under Flex down program.

If you’re hoping to put a down payment on a home in the near future, be sure to take the above tips into consideration. Not only will they make the down payment process easier overall, but they’re sure to help you purchase your dream home faster than you imagined. 

Originally published May 1, 2017, updated Jan 28, 2020.

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Photo credits: depositphotos.com




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