Unlike the early years of the 21st century, when buyers were only required to have a five percent down payment, if any at all, today’s home buyers must have between 10 and 20 percent as a down payment on purchasing a home. After the U.S. sub-prime mortgage disaster, Canadian lenders are much more cautious in approving mortgages. Managing to save $20,000 or more is not particularly easy, especially in today’s economic environment. Here are some simple steps that can help you save up the necessary down payment for your next home purchase.
Determine How Much You Need-
The first step in saving for that critical down payment is deciding how much you plan on spending for your future home purchase and setting a down payment goal of 20 percent of that amount. Having an exact amount for your savings goal will keep you motivated and allow you to accurately track your savings progress. You will also want to set a deadline and determine how much you will need to save each month to make the dream of becoming a homeowner a reality.
Start Saving Early-
Even if you are not planning on purchasing a home for five years or more, there are numerous benefits associated with beginning your down payment savings as soon as possible. Not only will saving early give you more time to acquire the necessary funds, but you will be able to open long-term savings accounts that offer higher interest rates. Such high yield savings plans can allow your savings to grow rapidly without much added effort on your part. They allow you to simply sit back and watch the beauty of compounding interest in action.
Keep Savings Separate-
Creating a separate savings account serves many benefits. As mentioned above, earning compounding interest can be a major benefit. As your account grows with each deposit or transfer you make, so will the interest you receive. You may start out earning $2.00 per month in interest, but that amount can easily turn into $200 each month after a few years. This will help you save much more in a shorter amount of time. Some local banks even offer first-time home buyers special accounts that earn them more interest.
Opening a savings account also allows you to separate your savings from your everyday checking accounts. You should only keep enough money in your checking account to cover monthly bills and everyday expenses. This will allow you to be much more diligent in your saving and not spend money you do not need. However, this money can easily be accessible in case an emergency may arise.
Make Contributions Automatic-
After you have determined the amount you need to save on a monthly basis, set up an automatic transfer of half of that amount from your checking into your savings account every two weeks. Sometimes, employers will even split your direct deposit into multiple accounts. After all, you will be less likely to spend money that you never directly see.
Cut Down on Expenses-
One of the oldest and simplest ways of saving money for a down payment is cutting back on monthly expenses. Start off by cutting back on a few things, such as morning lattes and eating out frequently, then increase cutbacks as you near your savings goal. In addition to freeing up more savings capital, paying off auto loan and credit cards also lower your debt to income ratio, which is a critical deciding factor in determining the mortgage rates you, will receive.
It may seem difficult saving 10 to 20 percent of a home’s value as a down payment, but consider that many Canadians are living in a time where it exists the lowest mortgage rates Canada has ever seen. In addition to having a lower mortgage payment once you have purchased a home, you will be paying for an investment that actually appreciates in value for once in your life. Following these steps will have you on your way to a healthy down payment savings in no time at all.