A home is likely the largest purchase you’ll make in your lifetime, so it’s wise to be prepared from the start. Understanding how to budget and save for a home is part of the first steps you’ll take toward buying one of your own. Whether it’s a big farmhouse on a large plot of land, a smaller townhome tucked away in a quiet neighbourhood or a two-bedroom condo in the heart of a city, purchasing a home of any size is a long-term investment. With the average cost of a home in Canada now reaching $686,650, and in some markets clocking in at over $1M, it’s become increasingly difficult for Canadians to afford to buy homes. For this reason, learning how to properly save for your home purchase in advance can have a positive impact on your outcome. Not to mention that better managing your money can positively impact all areas of your budget and life.
How Much Should I Save Before Buying A House?
In Canada, home buyers are required to pay at least 5% of the home purchase price as a down payment. If you put down less than 20%, you’re required to purchase mortgage default insurance. Since the insurance lowers the risk for the lender, this can still get you access to lower rates. However, if you plan to make at least a 20% down payment on your new home, not only will you be able to skip the cost of mortgage default insurance, you’ll likely have a lower monthly payment and pay less in interest over the life of the loan. There are pros and cons for each option, but if saving up 20% of the home’s purchase price just isn’t possible, know that it’s not required.
House Saving Tips
There are plenty of ways you can work toward saving up for your dream home. The more time you give yourself to get your finances sorted, the better position you’ll be in when it comes time to find and buy a home. Check out these simple saving tips to help you reach your goals faster:
Create And Stick To A Budget
Knowing and sticking to your budget is a big part of saving money for a home. Take the time to create a detailed budget that outlines all of your spending in cash and on cards each month so you can track where your money is going and take control of your habits to ensure you’re saving as much as you can.
Utilize free online calculators to get a better idea of how much buying a home will actually cost. This way you can be sure to factor everything into your savings plan up front. Scope out properties online in your budget range. Knowing what’s available on the market will help you better understand what you can afford based on your budget and will ensure you find the home you really love, and not just the first home you can afford.
You should also make it a point to get preapproved for a mortgage so you’re aware in advance what you can afford to buy, instead of just guessing. You may also consider saving up more money than necessary for a down payment to give you some leverage over other buyers.
Use A Tax-Free Savings Account
A tax-free savings account (TFSA) can be a great place to put your money as you save for a home. This account allows you to avoid paying income tax on the money you earn in interest as your balance grows. You’ll want to consult with a financial planner or your personal banking institution in advance to learn more about the limitations of this account and ensure it’s the right fit for your savings goals.
Pay Down Your Credit Card Debt
It can be difficult to save money for one thing, if you’re constantly paying money toward interest for something else. If you have the ability, focus on paying off as much of your credit card or other debt as possible. Whether this involves you paying off the smallest high-interest debt first or looking into options to consolidate your debt so you can pay it off together at a lower interest rate, you won’t regret taking this step first. As you free up more minimum payments from each individual card or loan debt, you can then push those payments toward paying off larger portions of your debt at once.
Prioritize Your Spending
Take note of where you spend the most money and make a conscious effort to redirect that spend into a savings account for your home. Are you guilty of dining out or going out for drinks all the time? Cut back on your spending at restaurants and bars. Constantly feel like you have to own the newest technology? Opt for an older model and resist the temptation to constantly upgrade. Do you usually take a few frivolous trips each year? Cut back on travel and save that extra cash. Once you create your budget, you’ll have a clearer understanding of where your money is going so you can make better choices about what to cut for the sake of saving.
Seek Out Government Programs
There are many government programs and incentives that home buyers across the country can take advantage of. There are also many province-specific programs you can investigate based on where to plan to buy your home. Keep in mind that each incentive/program comes with a series of requirements and will provide different benefits to applicants. For this reason, it’s important to do your research into the options so you can better understand what each one offers, and how they may suit your personal situation.
RRSP Home Buyer’s Plan
If you have a Registered Retirement Savings Plan (RRSP), this program allows you to borrow up to $35,000 tax free from your account specifically to fund your down payment. If you’re planning to purchase a home with a partner who is also a first-time home buyer, you can borrow up to $70,000 combined.
The Home Buyers Plan (HBP) is treated like a 15-year interest-free loan as long as you begin making payments back to your RRSP within 2 years of borrowing the money. It’s important to remember that the money you plan to use from your RRSP, must have been in the account for at least 90 days before you submit your application, and you also don’t have to repay the money to the same RRSP account.
RRSP First-Time Home Buyer Incentive
The HBI Program is a shared equity mortgage where the government supplies 5% – 10% of your down payment on a new home or 5% on an existing home in exchange for some equity in your property. This means when you sell your home down the line, you’ll need to pay back that equity to the government. Keep in mind, if your home increases in value over time, you’ll end up paying back more than you originally borrowed.
In order to qualify for this program buyers must already have a 5% down payment, must be first-time home buyers, have a household income of under $120,000, must not have had a previous divorce or broken common law relationship and can only borrow less than four times the qualifying income.
Land Transfer Tax Rebate
Available in Ontario, PEI or British Columbia, this tax rebate gives first-time home buyers back a portion of their land transfer tax paid on a condo, townhouse or detached house.
New Housing Rebate
If you’re planning to build a new house or renovate your current one, you could be eligible for a rebate of a portion of the building or renovation costs. You can also claim this rebate for nontraditional homes like mobile homes and floating homes. Do keep in mind that this rebate is only available if the fair market value of the house upon completion is deemed to be less than $450,000.
Also known as mortgage default insurance, this is valuable for home buyers who can’t afford to make a 20% down payment. While it’s not the same as traditional insurance, it instead protects the lender against potential default of mortgage payments. Trading an upfront fee and your commitment to make payments on time in exchange for a lower down payment, means one less barrier to buying a home for some Canadians.
First-Time Home Buyer’s Tax Credit
This tax credit allows first-time home buyers (or home buyers with a disability) to recover some of the costs related to the purchase of their home. This nonrefundable tax credit will cover home inspections, closing costs and legal fees at up to $750.
In order to qualify for this tax credit, you’ll need to make sure your purchased home is classified as a single-family home (both existing and newly built), condo, townhome, semi-detached home or duplex.
Set Up Auto Transfers
Put your savings on autopilot by scheduling automatic transfers between your accounts on a weekly, bi-weekly or monthly basis. This helps ensure that your savings account gets topped up at a frequency that works for you and with very minimal effort on your part. Just be sure to schedule your transfers with your incoming cash deposits in mind so you don’t wind up in overdraft by transferring more money than you have available to save.
Best Time To Buy A House
When it comes to buying a house, there are plenty of factors to take into consideration: inventory, pricing, location, benefits, interest rates and more. Buying a home at different times of the year may also present different pros and cons depending on the season and location. Understanding what each season brings to the table from a home buying perspective will help you better choose your ideal time to purchase, based on your goals and needs.
Since each Canadian’s home buying experience will vary greatly depending on the property of choice and priorities of the buyer, there is no right or wrong answer when it comes to the best time to purchase a house. However, there are certain times of the year that will present unique opportunities that may lead to better pricing and less competition:
The season of abundance, both in nature and in the Canadian housing market. It’s the most popular time of the year to buy a home because it immediately follows winter, a time when real estate agents have properties they’ve been waiting to sell. The housing market lull experienced during the winter months, bursts forth in the spring and leads to an increased sales inventory. Often properties are listed higher in the spring, as the grass turns green, flowers begin to bloom, and homes show better in the nicer weather. Spring also tends to be a popular time to sell for many parents with children as it gives them a chance to sell, move and get resettled before school starts again in the fall.
Just like with spring, summer can be a busy season for the real estate market as well. The market will be full of buyers who are ready to commit and prepared to act quickly when they see something they want. This means early summer can be just as competitive as spring, so if you can wait until later in the season, you may be able to get a better deal with less hassle. In most areas of Canada, the housing market will likely slow down toward the end of August so this is typically a good time to find a deal because sellers may be willing to cut prices further in order to sell before the fall.
If you plan to start looking for houses in the summer, be prepared to come in with a strong offer and competitive price. Sellers will be looking for a buyer who is organized, serious and ready to close the deal. Also keep in mind that summer weather can vary greatly depending on which province or city you live in. While the season is a busy time for real estate, it isn’t always ideal to be house hunting in sticky humid weather and extreme temperatures.
Some real estate experts consider fall the most ideal option. You may find homes for sale at this time of the year that have been on the market for a lot longer than is typical for the area. Keep in mind that this isn’t always a bad thing and can sometimes just mean the price was too high or it doesn’t fit the cookie-cutter mold of what most buyers are seeking.
If you’re on a budget or strapped for cash, fall can be a good opportunity to scoop up a great property from a motivated seller. Competition tends to drop around this time of the year as people, particularly parents, will have already secured their desired property prior to the start of school or have put the task on hold until the spring.
This is typically the season when you’ll find the best prices and the least competition across the board. While most sellers will suspend their listings from Thanksgiving through New Year’s, often the sellers who don’t are very motivated to sell. This means you can find yourself in a good position when it comes to making offers and striking up a deal. Since this is typically a slower time for the real estate market, you may also find that real estate agents are more open to negotiating closing costs and commissions.
Do keep in mind that while competition is low and there are plenty of deals to be had in the winter, the inventory can also be quite low compared to other seasons so it may be difficult to find your dream house, especially if you’re very specific about what you want or which areas you want to live in. Be sure to also factor in the weather where you live and how it will impact your ability to house hunt.
As you work toward saving up for a new home, remember that sometimes good things take time. Instead of rushing into a purchase, take the necessary steps to ensure that your personal finances and credit are in a good place before you jump in and start looking for properties. Buying a home can be very rewarding, but only if you’re prepared to take on the responsibility and financial commitment. Want to learn more about saving money for a down payment or buying your first home? Our team can help!