The GTA remains one of the hottest residential real estate markets in the country. Sales and prices reached record levels in 2015 and the momentum has carried into 2016. While this is good for current homeowners, it can be difficult for first-time home buyers to save up enough for a down payment. Fortunately, there are a number of ways you can save your way to a down payment in Toronto and the GTA .
Toronto Real Estate Remains Strong
The GTA is one of Canada’s hottest and strongest real estate markets. In 2015, the average price of all home types sold in the GTA increased 9.8% year-over-year to $622,217. The biggest increases came from detached homes, where sales climbed 12.6% in Toronto to $1.04 million and 12.1% in the 905 area to $728,015.1
That momentum has carried into 2016 with strong numbers posted in the first half of the year. Most recently, in May, a record 12,870 homes exchanged hands, a 10.6% increase from May 2015.2
The average price of all housing types in the GTA increased 15.7% to $751,908. Once again, detached homes saw the greatest increase. The average price of a property in Toronto increased 8.9% to $782,051. In the 905 area, the average price climbed 20.1% (more than $100,000) to $734,924.
It’s great that the housing market in the GTA is one of the strongest in the country, but this also poses challenges for those first-time buyers saving for a mortgage deposit. The question is, what are the best ways to save for a mortgage?
How Much You Need to Save for a Down Payment
First things first, how much do you need to save for a down payment in the GTA ? There is no set number since it’s pegged to the value of the property. On top of that, the mortgage rules have changed a great deal over the last decade. 10 years ago, you could purchase a home with zero down and get a mortgage with a 40-year amortization period.
You can still buy a home in the GTA with a down payment of just five percent. But if your mortgage deposit is less than 20% and a minimum of five percent, you need to pay mortgage insurance. The amount of mortgage insurance you pay is based on the size of the loan and length of the mortgage; premiums run from 1.8% to 3.6% of the total cost.3
In February 2016, the federal government tightened its lending rules, raising the minimum down payment for a home with a purchase price above $500,000 and under $1.0 million. Under the new rules, a first-time home buyer in Toronto needs to put down five percent on the first $500,000 and 10% on the next $500,000.4
If you wanted to save for a down payment on a home valued at $750,000, you would need to come up with $50,000—five percent on the first $500,000 and 10% on the remaining $250,000. Before the new rule came into effect, you could have purchased the same home with a down payment of just $37,500.
The new down payment rule also does not affect those looking to buy a home listed under $500,000. For those property buyers, the five percent down payment rule is still in place.
How to Save for a Down Payment
It can take a long time to save for a down payment in one of Canada’s most expensive cities. But there are a number of day-to-day and longer-term strategies you can use to help you save more money for your down payment faster.
- Pay Off Your Credit Card: Pay off your credit card debt before saving for your down payment. This will free up money to put toward your down payment. Not only that, you may not even qualify for a mortgage if you have too much debt.
- Save 20%: Save as large of a down payment as possible. The more you save, the smaller your mortgage. This translates into saving thousands of dollars in interest and home insurance charges over the life of the mortgage.
- Calculate How Much You’ll Need: You need to know how much you need to save for your down payment before you start saving. If you want to save 20%, divide the price of the house by 100 then multiply that by 20. For example, if your dream home is $350,000 ($350,000 / 100 x 20), you’ll need to come up with $70,000.
- Make a Timeline: Whether you’re starting from scratch or already have some money set aside for your down payment, make a timeline and figure out how much you need to save annually or each month. If your goal is to save 20% for your down payment in five years, you’ll need to save $1,250 each month ($75,000 divided by 60 months).
- Prioritize: If saving for a down payment is your top priority, you’ll need to prioritize or cut back on your sending. This could include moving into a smaller apartment or living with your parents, selling your car and taking the bus, making lunch, cutting back on vacations, putting a limit on gifts, not buying a pet until after you have a home, saying goodbye to cable TV and a landline telephone, and cutting your spending in restaurants and bars in half…or even more.
- Borrow from Your RRSP: It might be a good idea to borrow money from your RRSP if it will help you reach your goal of saving 20% for your down payment. The Home Buyers’ Plan allows first-time home buyers to borrow up to $25,000 from their RRSPs to buy a home.
Canadalend.com, Helping First-Time Home Buyers in the GTA
At Canadalend.com , we understand that there is no one-size-fits-all approach to mortgages and saving for your down payment. If you’re looking to buy a home in the GTA, the independent agents at Canadalend.com can help you find ways to save for your down payment.
By looking at your unique financial and long-term lifestyle needs, your licensed Canadalend.com agent will also show you what kind of mortgage you can expect to qualify for. As the country’s leading private mortgage company , Canadalend.com has access to hundreds of mortgage lenders who specialize in residential loans.
To find out what kind of mortgage products are best for you, contact Canadalend.com today. Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.
- “GTA Realtors Report Record Year for TREB MLS Home Sales,” trebhome.com, January 6, 2016; http://www.trebhome.com/market_news/release_market_updates/news2015/nr_market_watch_1215.htm.
- “GTA Realtors Release Monthly Resale Housing Market Figures, trebhome.com, June 3, 2016; http://www.trebhome.com/market_news/release_market_updates/news2016/nr_market_watch_0516.htm.
- “How Much Does CMHC Mortgage Loan Insurance Cost?” CMHC web site, last accessed July 5, 2016; http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm.
- “Bill Morneau tightens mortgage rules on homes over $500K,” cbc.ca, December 11, 2015; http://www.cbc.ca/news/politics/morneau-home-ownership-finance-1.3360610.