Saving up for a downpayment, whether it’s for your first home or for an upgrade, can feel like an impossible task. With so much going on in our everyday lives, and most of it costing money, it might seem to you like you’ll never be able to put aside that much money. But the truth is, there are so many things you can do to make your home ownership dreams a reality.
- First and Foremost, you have to know what you want, in a very real and concrete way. It’s not enough to say “I want a house.” You have to know exactly how much you’re willing/able to spend on a house so you can figure out exactly how much you need for a downpayment.
We are going to become hyper-focussed on achieving this goal so make it tangible and real. While it is possible to purchase a home with only a 5% downpayment, you will be considered a High-Ratio Mortgage (anything under 20%) as opposed to a Conventional Mortgage (20% or more downpayment) and will need to pay for mortgage insurance, usually through Canada Mortgage and Housing Corporation (CMHC). This insurance premium is usually added to your monthly mortgage payment or you can pay it off in one lump sum.
Let’s say you can find the right house for you and your family for $300,000 and you’re going to do a 5% downpayment of $15,000. Just to be extra smart, you’re going to plan ahead for those closing costs, moving expenses etc (usually these average around 2.5% of the cost of the home) and you decide to save $22,500 so you can buy a new home. Now we have a clear destination.
We’ll use SMART goal setting to map out our route:
2) Now that we have all the planning and goal setting done, I want you to not think about saving! That's right, stop having to think about it by making your savings automatic. Head over to the bank and set up an automatic withdrawl from every paycheck into your downpayment savings account. Be sure to choose a savings vehicle that will get you the most interest on your money. This is one of those times it pays to shop around and ask for what you want. If you've been a longstanding account holder at your bank and have other banking business with them, go ahead and ask for a better interest rate and let them know you're planning on getting a mortgage and they may offer you a better rate. In step one you figured out how much you could realistically afford to set aside from each paycheck so use that amount here. Let's say we are putting aside $300 from every paycheck so now we have $600/month out of the $1,000/month we're trying to save.
3) In order to afford that $600/month you're no longer spending, you're going to need to temporarily "cheapify" your life! So you have a book addiction? Swap Chapters for the library. Need a new thingamajig? Ask a friend to borrow one instead of going out to buy one or go for used rather than new. Give up eating out in restaurants for a little while in exchange for cooking at home and the extra money adds up pretty quickly. Can you cut back on the cable plan? Have an expensive hobby that can be put on pause or downsized for a bit (think one tee off time a week instead of 3). Remember this spending diet is going to have an amazing pay off at the end so don't think of it as "going without".
4) Look for earning opportunities hiding in plain sight. When we set our minds to something, we're often surprised by how achievable it really can be. If you look, you will likely be able to find a way to top that $600/month up to the $1,000 we need. Can you take on a part-time job once a week? Can you go back to being a one car family? Can you consolidate any debts to have a cheaper payment? Have you asked any lenders you are in good standing with to reduce your interest rates (i.e. credit cards, lines of credit etc...)? Is there a possibility of doing overtime at your work? Do you have a skill or talent you can put to work for you, like graphic design, painting, jewelry making, teaching piano lessons, babysitting, tutoring...Have you got things you no longer need or use that you can sell on Kijiji or Ebay (When was the last time you used those skis in the back of the shed? Do you really need 4 digital cameras?). Once you're in the habit of looking for earning opportunities, you kind of get hooked on it. You may find yourself keeping the habit up once the new house is bought just so you can save for a vacation or new furniture!
5) Redirect "found" money to your downpayment savings. Life sometimes gives us little gifts in the form of a monetary gift from a family member, a nice tax return, an unexpected raise or some other bit of good fortune. Be focussed on your goals and put that money to work for you rather than indulging in a shopping spree. If you get a debt paid off, like a credit card or car, keep making that payment into your downpayment account and watch your money grow! If you absolutely have to buy something and it turns out to be on sale, put the amount you saved into your downpayment account. Every bit helps so don't hesitate to put that extra $8.75 in coins at the bottom of your purse into the pot too.
6) Recruit! Recruit! Recruit! Tell all your family, friends and co-workers that you're saving for a downpayment and you'd like their support. Let them know that for the next little while you'd rather have a pot luck for Mom's birthday than an expensive dinner out. You want them all to know that you're up for a games night rather than a movie theatre night. Tell them you would love to hear from them when they know of a good sale so you can increase your savings and redirect money to your growing downpayment. You'll be surprised by how many people care and will want to help support you in this important goal you have. They can also help keep you in line with your goals by calling you out if you're spending too much on things you don't really need. That moral support really goes a long way in keeping you focussed because you're going to need to be in this for the long haul.
7) Finally, the most important thing you can do to be successful at saving a downpayment is to stay focussed on the final prize. Put up a picture of the house you want on the fridge to get a daily reminder of what you're doing and why you're doing it. Keep a chart in a visible place that shows your monthly targets. Go ahead and put some glittery star stickers on it when you achieve each monthly milestone. Write out a numbered list of all the reasons why you want this new house (1. more space for the kids 2. big enough yard for a garden 3. having an extra bathroom will make everyone's life so much easier...) and keep that list in your wallet so you can read it over every time you're tempted to spend money in the wrong place. Two years can be long time for a pay off so we need to keep reminding ourselves of our motivation in a tangible and meaningful way. Or you can just call me and I'll remind you of all the great benefits you'll get when you put that downpayment on the house of your dreams ;-)