Canadian Mortgages: 7 Ways to Save For a House
The idea of owning a home often fades to a distant dream for many Canadians simply by virtue of being an expensive investment. However, a structured approach and some basic financial planning can help potential homeowners make that dream a reality.
Here are 7 simple ways for Canadians to save enough to make their dream of owning a home come true:
1. Setting a budget goal.
The first step in saving for a home is to determine how much money is required, and to set that amount as a savings goal. This amount may include the deposit, utilities, building maintenance and any other expenses that may arise. Once this is figured out, then it’s time to start budgeting by calculating how much to spend each month on essentials such as utility bills and rent. This will help determine how much money you can afford to put aside each month towards your savings goal, as well as help establish a time frame for that goal.
2. Reducing unnecessary expenses
Saving not only requires isolating a portion of your income, but also includes studying your consumption habits to spot unnecessary expenses, further optimizing your budget to increase your savings.
Subscriptions to streaming platforms, a gym membership, and restaurant purchases are expenses that may seem small individually, but they quickly add up and become very significant when considered all together. Eliminating or reducing these expenses can affect a buyer’s lifestyle, but this will be offset by the benefit of accelerated savings.
3. Putting more than 20% down
Thе down payment is thе minimum amount a potential hоmеоwnеr рауs immediately towards thе hоuѕе price. Thе rеmаining amount iѕ converted intо a schedule of реriоdiс installments against the hоmе lоаn, known as the mortgage.
Not everyone can afford to put 20% or more of the total home price as a down payment. BUT, it is a great way to kill two birds with one stone for anyone who can afford it!
Why? Because all purchases with less than a 20% down payment must be insured with mortgage loan insurance from the CMHC, which can easily cost $3,000 to $5,000, or even much more.
By putting 20% or more down, there won’t be a need to pay for that insurance. Plus, the higher down payment results in a lower mortgage and a savings on interest charges which can add up to thousands of dollars over the lifetime of the loan. Obviously, this is a great way to save for anyone who can afford it.
4. Increasing credit score
One of the most important points that credit companies consider when paying off a loan is the borrower’s credit rating. Having a good credit rating reduces the risk for the lender granting the loan. It gives the impression that the borrower will not default on their loan.
An important aspect of maintaining a credit score is knowing your credit usage ratio, which is the ratio of your currently available credit to your actual credit limit.
The most expensive part of buying a home is not necessarily the down payment, but the interest rate paid over the lifetime of the mortgage.
The interest rate is in part determined by your credit score, which mean the difference between affordability and a cash haemorrhage. It pays to check your credit score early to ensure that everything is accurate, as well as to give you enough time to improve it in order to qualify for the best interest rate.
5. Creating new sources of income
Having a second job is the solution for people searching for a way to turbocharge their revenue. Although working more than one job is not an optimal employment situation, anyone wanting to buy a house must be ready to make this sacrifice.
6. Separating savings from finances
When saving for a house, creating an independent account for savings can bring many benefits. Some banks offer services such as automatic transfers from a customer’s payroll account, preferential interest rates when applying for loans and prizes for accumulating certain pre-determined amounts in their savings account.
Separating these finances will make money management easier and help avoid the temptation to spend what should be destined to be spent on your new home.
7. Reducing debt
Prior to planning to buy a house, it may seem logical (and fun) to convert any extra income into more potential debt, such as in purchasing a car, a boat, or anything else requiring installments. However, the first thing a lender looks for before approving a mortgage loan is the debt-to-income ratio (DTI).
The more debt a borrower already has, the less the probability of being approved for a mortgage. Even with approval, more prior debt can mean paying more mortgage interest and having a higher down payment requirement.
Before applying for a mortgage, a borrower needs to take some time to reduce their debt. Some of these debts may include: credit cards as well as student, personal, and car loans. This may require debt solutions to properly manage.
In conclusion
There are many good and efficient alternatives to help save and invest for a new home. Buying a house is not easy, but it is not impossible either. You simply need to be orderly and avoid spending on things that will be obstacles to achieving your desired goal.
What level of savings does a buyer need to afford their dream home? The Canadian mortgage calculator can help you to figure this out.