Saving for a down payment can be challenging for first-time homebuyers in Alberta. However, with some savings tips and financial planning, it’s possible to achieve your dream of home ownership.
Understanding down payments
When you make a down payment, the amount is deducted from the total price of your new home. The remaining cost is covered by your mortgage.
The minimum amount needed for a down payment in Alberta depends on the price of your home:
- If the purchase price of your home is $500,000 or less, the minimum amount of down payment is 5% of the purchase price.
- If the purchase price of your home is $500,000 to $999,999, you’ll need to pay 5% of the first $500,000 and 10% of the portion above $500,000.
- If the home price is $1 million or more, you’ll pay 20% as a down payment.
These rules apply across Canada. There are a few other considerations to keep in mind. The biggest is that if your down payment is less than 20% of the price of your home, you must buy mortgage insurance.
Setting your budget
A well-defined budget helps you understand how much you can afford to spend on a property. It also prevents financial strain and keeps your decisions grounded in reality. Here’s how to get it done:
- Assess your finances
Calculate your total income including salary, bonuses and any other sources of income.
- Track expenses
Track your expenses for a few months to understand your spending patterns. Categorize your expenses into essential (e.g., rent, utilities, groceries) and discretionary (e.g., entertainment, dining out).
- Debt consideration
Itemize your debts (student loans, credit card debt, car loans etc.). Factor in debt payments when determining how much you can allocate toward a mortgage. It’s also a good idea to avoid making large purchases before applying for a mortgage in order to minimize your debt-to-income ratio.
- Affordability ratio
As a general guideline, the cost of your mortgage (including taxes and insurance) should not exceed 28%–30% of your gross monthly income.
- Down payment savings
Once you have a clear picture of your finances, determine how much you can comfortably save for a down payment each month. Adjust your budget accordingly to reach your down payment goal within your timeframe.
Open a dedicated savings account
To keep your down payment savings separate from your regular savings, consider opening a dedicated savings account. This account should be used exclusively for your down payment savings, making it easier to track your progress. Avoid dipping into these funds for other expenses.
To make saving for your down payment easier, set up automatic transfers from your chequing account to your dedicated savings account.
To maximize your savings, you could also consider opening a high-interest savings account. Be sure to shop around to find the best rate.
Government programs and incentives
There are several government programs available to first-time homebuyers in Alberta that can help you save for your down payment:
- First-Time Home Buyer Incentive (FTHBI): this program is designed to help first-time homebuyers reduce their monthly mortgage payments by providing them an interest-free loan for 5%–10% of their home price toward their down payment.
- First Home Savings Account (FHSA): this is a federal government incentive that allows you, as a prospective first-time homebuyer, to save for your first home tax-free.
- Home Buyers’ Plan (HBP): this is another government-run program that allows Canadians to withdraw up to $35,000 from their RRSPs to help finance a down payment on a new home.
Increasing your income
If you're struggling to save enough money consider getting a part-time job. This could be anything from freelancing to selling items online. The extra income can go directly towards your down payment savings.
Staying on track can be challenging, but keeping yourself motivated will help you reach your down payment goal.
- Set milestones and celebrate achievements: break down your savings goal into smaller milestones. Each time you reach a milestone, celebrate your progress, even if it's just a small treat.
- Educate yourself: learn about the benefits of home ownership, such as building equity, potential tax advantages and the sense of stability it provides. Understanding these long-term advantages will reinforce your commitment to saving.
- Review your budget regularly: seeing the incremental growth of your savings will motivate you to keep up the good work.
- Stay informed about the real estate market: stay updated on real estate trends and property prices in your desired area. Knowing the market will help you set realistic goals and adapt your savings plan accordingly.