5 Ways To Save For a Home Down Payment in Canada

5 Ways To Save For a Home Down Payment in Canada

Are you planning to buy a house in Canada? Here are 5 ways to save for a down payment on your house. I also cover the various closing costs that you need to be prepared for.

The median home price in Canada rose to $816,720 in February 2022, an increase of 20% over the previous year. Although the average prices vary according to the provinces, the general trend of prices has been upwards.

New home buyers need a fairly large down payment if they plan to get a traditional mortgage.

If you are buying a home that costs less than $500,000, the minimum down payment required is 5%.

For homes priced between $500,000 and $1 million, a 5% down payment is required on the first $500,000 plus 10% for the remaining portion over $500,000.

When the purchase price of the home is $1 million or more, the minimum required down payment is 20%.

When your down payment is less than 20% (ie, 5% to 19.99%), your mortgage is called a high-rate mortgage and you must pay for mortgage loan insurance (also known as mortgage default insurance).

Depending on where your down payment falls in the 5% to 19.99% range, your mortgage default insurance premium ranges from 2.8% to 4.00%.

If you opt for a conventional mortgage (ie, with a down payment of 20% or more of the home’s purchase price), you generally don’t need to get mortgage delinquency insurance.

To determine how much you will need to save to prepare to buy a home, you should ask yourself the following questions:

  • How much house can I afford?
  • How soon do I need/want to buy a home?
  • What type of mortgage do I want to get, conventional or high ratio?
  • How much do I need for the down payment?
  • How much do I already have saved for a down payment?
  • What are my potential closing costs (1.5% – 4% of the purchase price)?

How to save for a down payment on a house

1. Budget and set a savings goal

Good old savings, huh? He already knows how much funds he needs and when he needs them. It’s time to start saving to reach your goal. To get started, identify your income, expenses, and what’s left after you deduct your expenses.

The equation looks like this: Income – Expenses = Leftovers for savings. To increase your savings on the right hand side, consider reducing your expenses.

Suggestions include spending less on toys, vacations, gifts, clothing, and food (packing a lunch) and avoiding spending on expensive items that can wait later.

Another strategy to increase your savings is to increase your income…more on that later. To streamline your overall savings, consider setting up an automatic payment plan. I find this the easiest way to save money and stay disciplined.

2. Use your TFSA

Continuing with the previous budget and savings, the use of the Tax Free Savings Account ensures that you can keep 100% of the growth earned in your savings. This will help you reach your savings goal faster.

If you’ve been eligible to contribute to a TFSA since its inception in 2009, you now have a total contribution room in 2023 of $88,000.

With the exception of some non-qualified or prohibited investments, you can invest in a wide selection of investment assets using your TFSA. Make sure your savings or investment portfolio reflects the time horizon you have in mind for buying your home.

3. RRSP and the Homebuyer Plan

You can borrow up to $35,000 from your RRSP and use it for a down payment ($70,000 for a couple).

The Home Buyer’s Plan is a program under the RRSP that allows you to withdraw funds from your RRSP tax-free when you purchase a home. You have up to 15 years to return the amount withdrawn.

4. Additional streams of income

Going back to “Revenue” in the equation: Income – Expenses = Leftovers for savings…increasing your income is one way to reach your down payment savings goal faster.

This may mean taking on a second or part-time job, doing a side or freelance job, etc.

When your income increases, the tendency is to want to spend more too and increase your expenses. You will need to be deliberate about saving your extra income.

5. Windfalls and monetary gifts

When you receive unexpected monetary gains or gifts, consider adding them to your savings.

These may include birthday and wedding gifts, bonuses and commissions in the workplace, inheritances, tax refunds, or income from the sale of unused items.

Don’t Forget Home Closing Costs

As a first-time homebuyer, you probably know how important it is to have a down payment ready when buying a home.

That said, while the down payment is one of your major expenses, it’s not the only one. There are various other expenses involved in buying a home.

These costs, often called “closing costs,” can add up to 1.5-4% of the home’s sales price.

13 Closing Costs of a House in Canada

Some of the closing costs to prepare for when buying a home include:

Home inspection fee

While not required, getting a professional home inspection is smart, especially if this is your first time buying.

The home inspector will inspect the condition of the house with respect to the structure, plumbing, ventilation, heating, etc. A full home inspection will cost you on average approximately $500 plus GST/HST.

Property Appraisal/Appraisal Fee

Your mortgage lender may require you to obtain a professional appraisal of the property to determine its value.

A property appraisal can cost between $250 and $500. Some lenders choose to pay the appraisal fee.

Property inspection fee

A survey shows the boundaries of the lot and indicates the location of major structures and any encroachments on the property.

A mortgage lender may ask you to provide a survey, or you may just want one to keep for peace of mind, especially if new structures or additions have been added to the home. A survey costs between $1,000 and $2,000.

title insurance

This is usually optional, but is recommended. Title insurance covers potential issues that arise after purchase, from title defects, survey errors, existing liens on the property, trespassing issues, zoning issues, etc.

Title insurance will cost you $300 or more.

Land Transfer Tax (LTT)

The land transfer tax is collected every time you buy a house. The cost varies by province and is usually a percentage of the purchase price.

Some provinces (including Alberta and Saskatchewan) do not charge a traditional LTT, while some cities (for example, Toronto) charge an additional municipal tax on land transfer.

Land transfer taxes are easily the second largest expense after down payment when closing costs are considered.

In Winnipeg, for example, buying a $425,000 home would result in a tax bill of $6,150. You can use Ratehub’s land transfer calculator to get an estimate.

legal fees

A lawyer is required to help you sort through legal documentation to make sure it is accurate and makes sense. Your attorney will also likely perform a title search and settle title insurance on your behalf.

These costs may be billed separately or combined with legal fees. Clarify this with your attorney before you begin.

Legal fees vary, with basic fees starting at around $500. After factoring in other expenses, including mailing, photocopying, etc., expect your final bill to be approximately $1,000 or more.

adjustment costs

Your lawyer prepares a statement of adjustments to ensure that prepaid costs such as utility bills, property taxes, condo maintenance fees, and other bills are fairly adjusted.

The seller gets a credit back if he has already paid any bills after the date he takes possession of the property.

home insurance premium

Some mortgage lenders will require proof of homeowner’s insurance prior to releasing funds on closing day. Home or property insurance covers the cost of replacing your home and its contents. It can be billed monthly or annually.

The cost will vary depending on the value of your home, its contents, location, the type of coverage required, your deductible, the presence/absence of an alarm system (fire and burglary), etc.

PST/HST on Mortgage Default Insurance

If you pay less than 20% of the purchase price as a down payment, your mortgage is considered a high-proportion mortgage and requires the purchase of mortgage loan insurance.

The premium can be financed through the mortgage; however, where applicable, the PST/HST for this insurance must be paid in advance. You can calculate the amount of your mortgage loan insurance CMHC here.

New Home Tax

If you are buying a new home, you may be subject to federal and provincial taxes. Tax is often built into the sales price, but it’s best to confirm before proceeding.

You may qualify for a partial refund of taxes paid when you file your tax return, but you’ll need to pay it up front when you buy the home.

property taxes

You are required to pay property taxes on a home you own. The tax is applied annually by the municipality where your house is located and must be paid monthly or annually. The property tax amount differs based on the assessed value of your home.

Legal impediment certificate fee

This fee is applicable if you are purchasing a condo. Also known as a certificate of status, the certificate of legal estoppel is a document that details important information related to the specific condominium unit and the condominium corporation.

Information includes statutes, rules and regulations, insurance information, property management and ownership, financial statements, etc. This fee can cost up to $100 or more.

Other costs

There are many other direct and indirect costs of buying a home. They include moving costs, new appliances, decorations, new furniture, renovations, repairs, utility connection fees, hand tools, vent cleaning, house cleaning, and many more.

These costs can range from a few hundred to several thousand dollars. you must plan for them in your budget.

final thoughts

Getting a mortgage is serious business, and saving for a down payment can take time.

Planning ahead by assessing your finances, budgeting, and setting up a savings account with an automatic payment plan will get you there eventually.

Consider buying a home you can afford, and remember, you can’t afford to forget about closing costs!