Are you dreaming of owning your first home in Canada but struggling to save enough money for a down payment? You’re not alone. Saving for a home can seem daunting, especially in a country with a high cost of living like Canada.
But don’t give up on your dream just yet. You can get started saving for your first home today with the right strategies and discipline. In this article, I’ll share some tips and tricks to help you save money for your first home in Canada, regardless of your income or budget.
How to Save For Your Mortgage Down Payment
Saving for your first home in Canada can seem daunting, but it’s achievable with some planning and discipline. Essentially, you need to save and save some more, spend wisely, and make more money. Here are some tips to get you started:
Determine how much you need to save
The first step is to figure out how much you need to save for a down payment on your first home. The amount you need will depend on the cost of the home you’re looking to purchase, as well as the minimum down payment required by your mortgage lender. In Canada, the minimum down payment required for a home purchase is 5% of the home’s purchase price.
Set a budget and stick to it.
Once you know how much you need to save, create a budget to save a portion of your monthly income towards your goal. Be realistic about your expenses and prioritize your savings.
Open an FHSA
The Tax-free first home savings account is new in 2022 and allows Canadians to save for a home with tax-deductible contributions, tax-free investment gains and no income tax on qualified withdrawals. This is the ultimate tool for saving for your first home in Canada because it obliges you to spend money on a home and nothing else.
Open a TFSA
with a TFSA, you can make tax-free gains and income tax-free withdrawals, but you are not restricted to what you can withdraw the funds for. There are pros and cons to this, you have liquid funds when you need them, but it may allow you to spend them when you should be saving for your pad.
Open a dedicated savings account.
Besides saving with a TFSA of FHSA, you could also open a separate savings account specifically for your home down payment. This will help you keep track of your progress and avoid dipping into your savings for other expenses.
You may not like the method here, but with three monthly savings obligations, you will save faster than you ever thought possible!
Use Your RRSP
In Canada, several government programs are available to help first-time homebuyers save for a down payment. For example, the Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP) tax-free to use towards your down payment, with the caveat that you repay it in full within five years.
Consider cutting back on expenses.
Consider cutting back on unnecessary expenses such as dining out or entertainment to boost your savings. Optimize your grocery spending. You could also look for ways to increase your income, such as taking on a side job or freelance work.
Explore mortgage options
When you’re ready to start shopping for a mortgage, explore your options and compare rates from different lenders. This can help you find the best deal and save money in the long run.
Remember, saving for a home down payment takes time and patience. But with a solid plan, you can make your dream of homeownership a reality.
How much Do I need to Save for my first home in Canada?
The amount you need to save for your first home in Canada will depend on several factors, including the location, type, and size of the property you’re interested in and your mortgage lender’s minimum down payment requirement. In Canada, the minimum down payment required for a home purchase is 5% of the home’s purchase price.
However, keep in mind that putting down less than 20% of the home’s purchase price means you must also pay for mortgage default insurance, which can add several thousand dollars to your upfront costs. This is available because the CMHC insured mortgages with less than 20% down.
To give you a rough idea, if you’re looking to buy a home with a purchase price of $400,000, you would need to save at least $20,000 for a 5% down payment.
It’s also important to factor in additional costs such as closing costs, legal fees, and moving expenses when budgeting for your first home purchase. These costs can vary depending on the location and type of property you’re buying, but you should set aside at least 1-3% of the purchase price to cover these expenses.
What is the CMHC minimum 5% down?
CMHC stands for Canada Mortgage and Housing Corporation, a federal government agency in Canada that provides mortgage loan insurance, housing policy and research, and affordable housing programs.
The CMHC’s primary role is to support the housing market and promote affordability by providing mortgage insurance to lenders who offer mortgages to first-time homebuyers with less than a 20% down payment. This insurance protects the lender if the borrower defaults on the loan, which allows the lender to offer lower interest rates to homebuyers.
This allows lenders to accept mortgages with a minimum of 5% down, which many call a CMHC mortgage (a CMHC-insured mortgage).
Other monthly or annual expenses to consider when you buy your first home
Once you purchase a home, there are several monthly and yearly expenses that you can expect to pay. Here are some of the most common expenses:
The most obvious expense, which now replaces rent payments. Your mortgage payment is the monthly amount you pay to your lender to repay your home loan. This payment includes both the principal and interest on your loan.
Property taxes are a tax levied by the government on the value of your home. These taxes can vary depending on the location and value of your property. There are grants, and your mortgage generally covers your home taxes; ensure you’ve got this covered and apply for the grant each year.
You will be required to get home insurance or be able to qualify for home insurance before you can finalize the purchase of your new place.
Homeowners insurance is a type of insurance that protects you and your home from damage or loss. This insurance typically covers theft, fire, and natural disasters.
Maintaining your home is an ongoing expense, including routine repairs, cleaning, and landscaping. You should budget for these monthly expenses to ensure your home stays in good condition. You can make these costs minimal if you have to, but a certain amount of maintenance is required.
Utilities include your monthly expenses for electricity, gas, water, and other services like internet and cable TV. So cut back to that free Roku, turn down the heat, and take cold showers.
Homeowners Association Fees
Suppose you live in a community with a homeowners association (HOA). In that case, you may be required to pay monthly or annual fees to cover the cost of maintaining common areas like parks or community centers.
Strata fees are fixed and will likely increase slowly and forever, so consider this when you purchase a Strata or apartment.
Renovations and Upgrades
Over time, you may want to make upgrades or renovations to your home, which can be an additional expense. Moreover, you will undoubtedly have a list of wants for your new home that may slowly diminish as you lose your spirit to get things done. So make sure you have some cash to make it easier.
Budgeting for these expenses and your mortgage payment is essential to ensure you can afford homeownership’s ongoing costs.
How Will You Save for Your First Home?
In conclusion, saving for your first home and down payment on a mortgage in Canada requires a combination of financial planning, budgeting, and research.
Determining how much you can afford is essential, as setting a realistic savings goal and exploring different savings strategies like a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP).
Working with a trusted mortgage professional can also help you navigate the complex home-buying process and ensure that you find a mortgage that fits your needs and budget.
By planning and saving, you can achieve your dream of homeownership and enjoy the many benefits of owning a home in Canada.