Saving For a Down Payment

Piggy bank and house keys

There are a lot of things to consider when you’re looking for your first home. One of the most important is how much money you’ll need as a down payment and where that money is going to come from. Unless you’re expecting a big raise at work or a second job, your savings fund will have to come from your existing income, so it’s important to have a plan in place.  

At a minimum, you’ll need 5% of the purchase price of your house as a down payment. Having more helps too – the more you can put down, the less you’ll have to borrow, which will lower your monthly payments. As well, if you want to avoid paying a High Ratio Mortgage Loan Insurance premium through CMHC you’ll need to put down at least 20% of the purchase price.

If you want to buy a house but have just started to save, here are a few tips to help you reach your down payment target a little sooner.

1. Make a Budget

Start a budget by subtracting fixed monthly fixed expenses such as rent, utility bills, and loan payments from your net monthly income (monthly income after tax). After that, you’ll need to consider your variable monthly expenses such as groceries, transportation, and entertainment. Are there areas you can save money every month like bringing your lunch or coffee to work instead of eating out or buying a latte? Every extra dollar you can save is one you won’t have to borrow when you buy your home.

Finally, after you’ve figured out how much money you’ll need to live comfortably each month, you should actively budget an amount to save. Consider setting up an automatic transfer to a separate bank account dedicated to your down payment for the remainder of your monthly income and you’ll be surprised how quickly your savings grow.

2. Open a Down Payment Savings Account

Opening a savings account is important for two reasons. First, it allows you to keep money allocated for special purchases separate from funds used for day to day spending. Second, a savings account will earn higher interest and the faster you grow your savings the faster you can purchase that new home.

3. Purchase GICs

If purchasing a home is still a few years away, invest in GICs. GICs allow you to earn more interest by locking your money away for a period of time, and another benefit is that you won’t be tempted to spend that money until it’s time to buy your house.

4. Payroll Deductions

Does your employer offer payroll deductions to encourage saving? If so, take advantage of these programs. You are far less likely to spend money that doesn’t go into your chequing account and just make do with what is available to you.

5. Make RRSP contributions

The Home Buyers’ Plan is a government program that lets first-time home buyers withdraw up to $25,000.00 from their RRSP for the purchase of a home. You will need to pay it back into your RRSP within 15 years of the withdrawal but it’s a great way to get started with retirement savings while employing a strategy that could help you buy a home sooner. Contributing to your RRSP can help result in a bigger tax refund come tax season – money that you can add to your RRSP to further accelerate savings growth.

Whatever your timeline, it’s important to have a plan in place that works for you. Talk to your financial institution and arrange to meet with an advisor to discuss your savings and home-buying strategy.

Thinking about buying your first home? Check out Tips For First Time Home Buyers!