Planning to buy a home in Canada? Here are 5 ways to save towards your home down payment. I also cover the various closing costs you need to be prepared for.
The average home price in Canada climbed to $816,720 in February 2022, a 20% increase over the previous year. While average prices vary across provinces, the general price trend has been up.
New home buyers need a fairly hefty sum for a down payment if they plan on getting a traditional mortgage.
If you’re buying a house that is less than $500,000, the minimum down payment required is 5%.
For homes priced between $500,000 and $1 million, a down payment of 5% 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 down payment required is 20%.
When your down payment is less than 20% (i.e. 5% to 19.99%), your mortgage is referred to as a high-ratio mortgage, and you’re required to pay for mortgage loan insurance (aka 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 choose to go with a conventional mortgage (i.e. put down 20% or more of the purchase price of the house), you are generally not required to obtain mortgage default insurance.
To determine how much you will need to save in preparation for buying a house, you should ask yourself the following questions:
- How much home can I afford?
- How soon do I need/want to buy a home?
- What type of mortgage do I want to obtain – conventional or high ratio?
- How much do I need for a 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)?
Related: How To Buy a Home in Canada.
How To Save For a Down Payment on a Home
1. Budget and Set a Savings Goal
Good ol’ savings, eh? You already know how much funds you need and when you need them. It’s time to start saving up to reach your goal. To start, identify your income, expenses, and what’s left after deducting your expenses.
The equation looks like this: Income – Expenses = Leftover for savings. To increase your savings on the right-hand side, consider cutting down on your expenses.
Suggestions include spending less on toys, vacations, gifts, clothes, and food (pack a lunch) and avoiding spending on big-ticket items that can wait for later.
Another strategy to increase your savings is to increase your income…more on this later. To expedite your savings in general, consider setting up an automatic payment plan. I find this to be the easiest way to put money aside and stay disciplined.
2. Use Your TFSA
Following from budgeting and savings above, using the Tax-Free Savings Account ensures you can keep 100% of the growth earned on your savings. This will help you reach your savings goal faster.
If you have been eligible to contribute to a TFSA since its inception in 2009, you now have a total contribution room in 2023 of $88,000.
Except for a few non-qualified or prohibited investments, you can invest in a wide selection of investment assets using your TFSA. Ensure your savings or investment portfolio reflects the time horizon you have in mind for buying your home.
3. RRSP and the Home Buyers’ Plan
You can borrow up to $35,000 from your RRSP and use it for your down payment ($70,000 for a couple).
The Home Buyer’s Plan is a program under the RRSP that enables you to withdraw funds from your RRSP tax-free when you’re buying a home. You have up to 15 years to pay back the amount withdrawn.
4. Additional Streams of Income
Going back to “Income” in the equation: Income – Expenses = Leftover for savings… increasing your income is one way to reach your down payment savings goal faster.
This may involve taking on a second or part-time job, taking on a side gig or freelance work, etc.
When your income increases, the tendency is to want to spend more as well and increase your expenses. You will have to be deliberate about saving your additional income.
5. Windfalls and Monetary Gifts
When you come by monetary windfalls or gifts, consider adding them to your savings.
These can include birthday and wedding gifts, workplace bonuses and commissions, 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 your down payment ready when purchasing a home.
That said, while the down payment represents one of your major expenses, it is not the only one. There are several other expenses involved in buying a home.
These costs, often referred to as “closing costs,” can add up to anywhere from 1.5 to 4% of the selling price of the house.
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13 Closing Costs for a Home in Canada
Some of the closing costs to prepare for when buying a house are:
Home Inspection Fee
While not mandatory, having a professional home inspection done is smart, especially if you are a first-time buyer.
The home inspector will inspect the house’s condition concerning structure, plumbing, ventilation, heating, etc. A full home inspection will cost you approximately $500 on average plus GST/HST.
Property Appraisal/Valuation Fee
Your mortgage lender may require you to obtain a professional appraisal of the property to determine its worth.
A property appraisal may cost anywhere from $250 to $500. Some lenders choose to pay the appraisal fee.
Property Survey Fee
A survey shows the boundaries of the land and indicates the location of major structures and any encroachments on the property.
A mortgage lender may require that you provide a survey, or you may just want one for keeps to ease your mind, especially if newer structures or additions have been added to the house. A survey costs between $1000 and $2000.
This is usually optional but is advisable. Title insurance covers potential issues arising after the purchase, from title defects, survey errors, existing liens on the property, encroachment issues, zoning issues, etc.
Title insurance will set you back $300 or more.
Land Transfer Tax (LTT)
Land transfer tax is charged whenever you buy a home. The cost varies based on the 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 (e.g. Toronto) charge an additional municipal land transfer tax.
Land transfer taxes are easily the second-largest expense after the down payment when considering closing costs.
In Winnipeg, for example, buying a $425,000 house would attract a $6,150 tax bill. You can utilize Ratehub’s land transfer calculator to get an estimate.
A lawyer is required to help you sort through the legal paperwork to ensure it is accurate and makes sense. Your lawyer will also likely conduct a title search and sort out the title insurance on your behalf.
These costs may be billed separately or combined with the legal fees. Clarify this with your lawyer before you start.
Legal fees vary, with basic fees starting at around $500. After incorporating other expenses, including mailing, photocopying, etc., expect your final bill to be approximately $1000 or more.
A statement of adjustments is drawn up by your lawyer to ensure that prepaid costs like utility bills, property taxes, condo maintenance fees, and other bills are adjusted fairly.
The seller gets a credit back if they have already paid some bills past the date you take ownership of the property.
Home Insurance Premium
Some mortgage lenders will ask for proof of home insurance before they release funds on closing day. Home or property insurance covers the cost of replacing your home and its contents. It may 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 put down less than 20% of the purchase price as a down payment, your mortgage is considered a high-ratio mortgage and requires buying a mortgage loan insurance.
The premium can be financed through the mortgage; however, where applicable, the PST/HST on this insurance must be paid upfront. You can calculate the amount of your CMHC mortgage loan insurance here.
Tax on New Homes
If you are buying a brand-new house, you may be subject to both federal and provincial taxes. The tax is often incorporated into the sale price, but it is better to confirm before proceeding.
You may qualify for a partial rebate on taxes paid when filing your income tax return, but you will need to pay it upfront when buying the house.
You are required to pay property taxes on a house you own. The tax is levied annually by the municipality where your house is located and must be paid either monthly or annually. the amount of property tax differs based on the assessed value of your home.
Estoppel Certificate Fee
This fee is applicable if you are buying a condominium. Also known as a status certificate, the estoppel certificate is a document detailing important information relating to the specific condo unit and the condominium corporation.
The information includes bylaws, rules and regulations, insurance information, property management and ownership, financial statements, etc. This fee may cost up to $100 or more.
There are many other direct and indirect costs of buying a house. They include moving costs, new appliances, decorations, new furnishings, renovations, repairs, utility hook-up fees, hand tools, vent cleaning, house cleaning, and many more.
These costs may range anywhere from a few hundred to several thousand dollars. you should plan for them in your budget.
Related: Mortgage Broker vs. Big Bank
Getting a mortgage is a 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 cannot afford to forget about closing costs!