How to save for the down payment of your new home

You’ve made one of the biggest decisions of your life and decided to become a homeowner. You’re probably wondering how to save up for this major investment. In the following article, you’ll learn all about the 20 percent down payment rule and get tips on how to come up with the cash, from careful budgeting to the Home Buyer’s Plan (HBP).

Down payments and the 20 percent rule

A down payment is the amount of money you need to secure a mortgage. The funds must come from your personal savings or be gifted; they can’t come from a loan or line of credit. If you participate in the HBP, your funds must be in your RRSP for at least 90 days before you can withdraw them. This means that you need to plan ahead of time!

But how big does your down payment really need to be?

Aim for 20 percent or more

You’ll often hear that your down payment should be at least 20 percent of the price of your home. This is because buyers who meet this condition are automatically approved for a mortgage. They also don’t need to buy mortgage loan insurance, which is an added benefit as far as their bank account.

To give you an idea, a 20 percent down payment on a $250,000 condo comes to $50,000.

Get insured if you have less than 20 percent

If the down payment for your home is under 20 percent, the government requires that you buy mortgage loan insurance. This condition was implemented following the 2007 subprime mortgage crisis and aims to protect lenders from payment defaults. You can purchase this type of insurance through the Canada Mortgage and Housing CorporationAttention, this link will open a new tab.(CMHC), Genworth CanadaAttention, this link will open a new tab. , or Canada GuarantyAttention, this link will open a new tab..

The cost of the insurance premium is calculated based on the value of your mortgage and the size of your down payment. The CMHC provides a general idea of the premiums they chargeAttention, this link will open a new tab., but the exact premium will be calculated when you apply for a mortgage. You’ll need to factor it into the purchase price of your home, as well as your budget. Remember, the premium cost can be included in your mortgage payments. If this amount is spread over 25 years, you’ll barely see a difference in your monthly instalments. This is a great solution for those seeking an affordable way into the housing market.

Pay the minimum 5 percent if you’d rather not wait

While the minimum down payment to buy a home is 5 percent, buyers who choose this option must meet certain conditions. Namely, they must be purchasing a primary residence and have enough savings to cover any attributable expenses, such as notary fees.

If you’re asking yourself what the ideal down payment is for your first home, keep in mind that the answer is complicated and depends on the market. Since every case is different, it’s best to consult with a financial advisor who can assess your situation, compile the facts, and help you explore different scenarios.

Evaluate your affordability

While discipline and motivation are powerful drivers when pursuing any goal, assessing your affordability is essential for realizing a major project like buying a house. Before you start saving, identify your basic housing requirements. Take a moment to reflect. What kind of house is best suited to your needs? Next, calculate the costs associated with this type of property (e.g., purchase price, school taxes, municipal taxes) and determine what you can afford. Don’t hesitate to meet with a financial advisor if necessary!

Test your affordability

To paint a realistic picture of your affordability, try to save the difference between your current housing expenses and the costs associated with the house you hope to buy. After six months, you’ll know whether or not you can handle these new financial responsibilities. Plus, you can put the money you save towards your down payment.

When calculating your expenses, don’t forget to include heating and electricity fees, mortgage payments, condo fees, and property taxes. Important: Specialists recommend that your total expenses not exceed 30 percent of your current gross income, or your salary before deductions.

Let’s take the example of a future homeowner who makes $48,000 per year, or $4,000 in gross monthly earnings. According to the 30 percent rule, their monthly property fees should not exceed $1,200. For property fees of $1,000 per month, the buyer should try to save $600 per month to test their affordability.

Seek services to help you save

Once you've determined your affordability, it's time to get serious about saving for your down payment. Luckily, several services are available to help.

Consider the Home Buyers' Plan (HBP)

The Home Buyers' Plan (HBP) is a valuable program for future homeowners, as it allows you to withdraw up to $60,000 from your registered retirement savings plans (RRSPs) to put towards your down payment, tax-free.

To participate in the program, you must meet the HBP eligibility conditionsAttention, this link will open a new tab.Attention, this link will open a new tab., which include the following:

• You must be considered a first-time home buyer.
• You must have a written agreement to buy or build a qualifying home for yourself.
• You must intend to occupy the qualifying home as your principal place of residence within one year of buying or building it.

If you have a spouse or common-law partner, either of you may participate in the program.

If you or your spouse or common-law partner have previously owned a home, you may still be considered a first-time home buyer if your HBP balance is zero on January 1 of the year during which you plan on withdrawing funds. You may also need to meet other conditions (e.g., you have not occupied a primary residence that you own for at least four years).

Two years after you purchase your home, you must begin reimbursing the amount withdrawn from your RRSPs. This reimbursement can be distributed over 15 years. The minimum annual payment will be 15 percent of the total. So, a buyer who withdraws $60,000 will need to repay at least $4,000 per year.

Simplify your life with automatic savings

Saving is never easy, but automatic savings can help. With this type of plan, a fixed amount is automatically deducted from your salary or withdrawn from your bank account and transferred to an RRSP or high-interest savings account, for example. Choosing this option allows you to save without having to think about it. Plus, you're less likely to spend the money in your account. It's a win-win situation for building a down payment.

If you choose to use an RRSP, consider reinvesting your tax savings into an RRSP, a TFSA, or a savings account. You should also bear in mind that a labour fund RRSP offers additional tax savings compared to a normal RRSP. With automatic bank withdrawals, you can then contribute to the RRSP+ with the Fonds and benefit from an additional 30 percent in tax savings,¹ making it even easier to achieve your down payment. Don't forget that you can always modify your contribution amount to suit your needs.

Master your budget

It goes without saying that when you set a financial goal, like saving for a down payment, you need to establish—and stick to—a budget.

First, go through your expenses. How much of your income goes to rent, groceries, public transit, bicycle repairs, Internet, electricity, health care, debt payments, and so on? Make sure to consider discretionary spending, meaning expenses related to outings, entertainment, shopping trips, and all other leisure activities.

Once you've made your budget, look for areas where you could cut back on spending. With every dollar you save, you'll be closer to your goal.

If you follow these practical tips and seek guidance from a financial advisor, you'll be buying your dream home in no time!