Buying a home can seem out of reach if you don’t have a substantial amount saved for a down payment. However, there's a strategy that can help you create your own down payment and get into a $500,000 home with just $5,000 in savings. Here’s how you can do it:
Step 1: Understand the Down Payment Requirement
For a $500,000 home, the minimum down payment required is typically 5%, which is $25,000. If you already have $5,000 saved, you need an additional $20,000.
Step 2: Account for Closing Costs
In addition to the down payment, you’ll need to cover closing costs, including land transfer taxes and legal fees. For a $500,000 home, these costs can total around $5,000.
Step 3: Use RRSP Loans
You can utilize the Home Buyers' Plan (HBP) to borrow from your Registered Retirement Savings Plan (RRSP). If you and a partner each take out a $10,000 RRSP loan, you’ll have $20,000 available. These loans can be paid back over a longer period, such as 10 years, to keep monthly payments manageable.
Step 4: Calculate Your Total Funds
Combining your initial $5,000 savings with the $20,000 from the RRSP loans, you’ll have $25,000. This covers the down payment but not the closing costs yet.
Step 5: Leverage Tax Refunds
The RRSP contributions will reduce your taxable income, resulting in a tax refund. If your marginal tax rate is 25%, a $10,000 RRSP contribution could yield a $2,500 tax refund. For two people, this amounts to $5,000, covering the closing costs.
Final Calculation
Initial Savings: $5,000
RRSP Loan: $20,000
Tax Refund: $5,000
Total Available Funds: $30,000
This total allows you to cover the $25,000 down payment and the $5,000 closing costs, making homeownership a reality sooner than traditional saving methods.
Why Traditional Savings Don’t Work
Saving $500 a month to accumulate $25,000 would take about 4 years. During this time, property values could increase significantly, potentially making the home unaffordable in the future. By creating your down payment now, you avoid higher future costs and the need for a larger mortgage.
Conclusion
Traditional savings methods may not keep pace with the rising costs of homeownership. By leveraging RRSP loans and tax refunds, you can create your down payment and become a homeowner faster. Subscribe to our blog for more strategies to help you achieve your homeownership goals.