If Not Buying, Then How To Fare?

Saving for a down payment on a property can seem like an impossible task given current market conditions. High prices and high interest rates compared to the past few years make property ownership difficult - be it residential or commercial.

In Ontario, Canada, real estate markets can be competitive, and so understanding your options for healthy down payment accumulation is crucial. This article will guide you through various resources available to help you make the best of your energy.

Why is Focus on Down Payment Important?

The down payment is the first step to cover when considering the purchase of a property. It translates to how much risk you are devoting to your investment.

Down payment is essentially a lump sum payment made upfront towards the purchase of a property. It serves as your initial equity in the property and reduces the amount of money you need to borrow through a mortgage. Generally, a larger down payment can also help you secure more favourable mortgage terms and lower interest rates. The lender take on less risk with you this way and you have more "skin in the game", which inspires confidence in you as a borrower.

Typically, the minimum required down payment for a property under $500,000 is 5% if you are a buying a residential property for the first time. The difference between $0.5M to $1M in down payment is required 10% of the purchase price.

For example, say the condo you are interested in costs $800K, then you need 5% on the first $500K (so $25K) and 10% on the remainder of $300K (another $30K), totalling $55K necessary for down payment. Remember you also need to have enough saved up for closing costs (which usually makes up between 1.5% to 4% of the property price).

Generally, over $1M, there are sliding scales in place and typically 20% down payment is noticed in transactions of up to $1.5M. Anything over $1.5M allows for room for discussion as many commercial transactions have been financed at the 70 to 75% LTV comfortably, according to the borrowers' financial strength and repayment capacity. Generally, the higher the purchase price, the lower the loan-to-value, but not always - it becomes case specific.

Exploring Traditional Savings Methods

Much of earning has to do with proper money management. "Earning" meaning to receive as return for effort and especially for work done or services rendered. Why not start with personal finances? Many little expenses can allot for one big liability when accounting. Let us analyze the best ways you can make the best of your money:

1. Setting Up a Dedicated Savings Account

One of the most common methods for saving for a down payment is to open a dedicated savings account. This allows you to separate your down payment funds from your regular expenses and track your progress towards your goal. It is more efficient to pay yourself first than to make your recurring debt payments first. This puts you in the driver seat of your life instead of your debt.

2. Budgeting and Cutting Expenses

Reviewing your monthly expenses and creating a budget can help you identify areas where you can cut back and allocate more funds towards your down payment savings. Consider reducing discretionary spending and finding ways to save on essentials like groceries and utilities. Do you really need TV streaming services or expedited shipping on items you likely will not need? Put these in perspective.

3. Home Buyers' Plan (HBP)

In Canada, the Home Buyers' Plan (HBP) allows first-time homebuyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to put towards a down payment, tax-free. This program can be a valuable resource for those looking to accelerate their savings while taking advantage of tax benefits.

4. Considering Investment Strategies

a) Private Lending

Have you considered becoming a private lender? As a private lender, you have the opportunity to provide individuals and families with the means to achieve their dreams of homeownership while simultaneously growing your wealth. With careful due diligence and risk management, you can enjoy steady cash flow, attractive interest rates, and the satisfaction of helping others secure their futures. Join the ranks of savvy investors who are taking control of their financial destinies through private mortgage lending. No minimum investment is required, yet lending conditions change according to the deal.

b) Investing in Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) allow investors to pool their funds to invest in a diversified portfolio of real estate assets. Investing in REITs can provide potential returns that can be used towards a down payment while offering liquidity and flexibility.

c) Building a Portfolio with High-Yield Dividend Stocks

High-yield dividend stocks offer higher returns compared to traditional stocks and generally require less management, allowing you to grow your down payment funds quicker. Consider diversifying your investment portfolio with a mix of high-yield dividend accounts and other investment vehicles to maximize returns.

Parting Words

Essentially, you want to change your perspective on what down payment means for you: it is still your money, only it is being held by Real Estate in the form of equity, instead of you collecting it in the bank, for example. Why not multiply it if you can? Assess your risks and take action. Do not sleep on your laurels.

Saving for a down payment on a property in Ontario, Canada requires careful planning and consideration of various options available. Whether you choose to leverage government programs, explore alternative financing options, or invest strategically, it's essential to stay informed and make decisions that align with your financial goals.