Trust me. This post isn’t going to tell you that you need to stop eating your avocado toast. And honestly? Who eats that much avocado toast anyway… if you do, what’s the point in owning a home if you can’t enjoy eating the things you like eating and doing the things you like doing?
When it comes to how to save for a house, there are much better strategies out there than sacrificing your favourite morning meal.
How to Save For a Down Payment on a House
Before we get into strategies for saving up for a Down Payment, there was a MASSIVE change in the down payment required to purchase a home last year that you need to know about before we proceed.
My first tip for you is that you may no longer need as much money as you thought you did for a down payment. You see, in December 2024 huge changes were made to insured mortgage down payment requirements.
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A New Minimum Down Payment
In simple terms, when you haven’t saved a 20% down payment, you seem riskier to financial institutions. They’re more hesitant to lend to someone who hasn’t been able to save up a substantial amount of money for a home purchase.
Mortgage Insurance: What You Need to Know
Cue: Insured Mortgages – a type of mortgage that REQUIRES you to pay mortgage default insurance. This insurance protects the banks (lenders) in case you, the borrower, defaults on their mortgage. In Canada, CMHC and Sagen are amongst the two biggest providers of this insurance.
So what does this mean if you want to know how to save for a down payment? Pre-December 2024, if you didn’t have a 20% down payment, you would only be INSURED and APPROVED to buy a home that was under $999,999.99.
Good news – the limit has been increased to home prices of up to $1.5MM. So not only can you afford a more expensive home, but the down payment required of you has been basically cut in half!
What would’ve required a $300,000 down payment last year (on a purchase of $1.5MM), will now “only” require you to save a down payment of $125,000 (5% on the first $500,000 and 10% on the remaining purchase price, UP TO $1.5MM).
Of course, you will still need to qualify for the difference, but that’s for another blog post!
Using a down payment calculator is a great tool to help figure out what you can afford. CMFH has helpful mortgage and affordability calculators to help guide you as you get started in your home buying journey.
Take Advantage of Government Tools
Ok. Now that we know you don’t need as much of a down payment as you did last year, let’s tackle the lowest-hanging fruit. First, we need to look at ways to save that double duty.
Home Buyers Plan
An Oldie but a goodie, “The Home Buyer’s Plan (HBP) is a program that allows you to withdraw from your registered retirement savings plans (RRSPs) to buy or build a qualifying home for yourself.”
Currently, the HBP withdrawal limit is $60,000. If you don’t have $60,000 in your RRSPs yet, that is the FIRST thing you need to do. The tax savings/benefits you get from contributing to your RSPs, especially in years where your income may not be as high, may also net you a bigger return from the government at tax time, which you can then add back to your RSPs.
Don’t have money to contribute? Talk to your Financial Institution about RSP loans – Essentially it’s money the bank loans you to make a contribution. Depending on your income, typically you would get money back from CRA at tax time, which you can use to pay back the loan, all while your money is invested in your RSP!
First Home Savings Account
Think of this account as what would happen if an RSP and a TFSA account had a baby. All the money you put in your FHSA grows tax-free like a TFSA account, AND contributions you make to your FHSA account are generally deductible and can be used to reduce your income tax ( like an RSP). The max you can contribute in your first year is $8000 and to a total of $40,000.
Between those two accounts, that is a total of $100,000! So you are saving for a down payment and have created this kind of cyclical money-making machine, not only in the refunds you get back at tax time but because they grow TAX-FREE.
Start Saving
If you don’t have these accounts opened up yet, why not? Run, don’t walk to your nearest Financial Institution and get these set up pronto. They were created to help potential homeowners like yourself, not only save for a house but get some tax savings along with the ride.
Searching for advice on buying a family home? I’ve got plenty more advice-filled blogs.
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Pay Yourself First
One of the best ways to save money for a down payment is to pay yourself first. Each time you get paid, have a portion of your pay go automatically to a savings account.
Bonus points if it’s not held at the same Financial Institution you do your everyday banking at – out of sight, out of mind. If you have the good fortune of not currently paying rent, I would put up to 40% of your pay into this special savings account. Sounds like a lot right?
Even though most economic think tanks suggest you spend no more than 30% on home costs, with the current price of homes that number is inching up. If you’re still living at home with your parents, there is no easier time to save your money.
If you’re currently renting, calculate what it would cost a month in mortgage payments. If your rent is currently less than that, save the difference. There is no right number, but you have to be aggressive if home ownership is a goal of yours. Whatever % of your pay you are comfortable putting away, make it automatic, and don’t make it easy to take from.
Ready to buy your first home? I can help! Reach us at 416.837.9676 or steph@stephaniek.ca to start your journey.
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