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The Nuts and Bolts of Saving for A Home Down Payment

Update: On April 11, 2024, the Federal government announced an expansion to the withdrawal limit for the RRSP Home Buyers’ Plan, to $60,000 from $35,000. This will go into effect on April 16, 2024. This is the second time the withdrawal limit has been increased since it was introduced in 1992; it was last updated from a limit of $25,000 in 2019.

The new measure will also extend the amount of time home buyers have before they need to start making repayment instalments, to five years from the current two, for those who make HBP withdrawals between January 1, 2022, and December 31, 2025. 

Check out our blog to learn more about the government’s announcement.

As the average price of a home in Canada continues to rise (hitting $503,057 earlier this year) and the new down payments rules for homes costing more than $500,000 coming into effect, saving for a down payment on your first home has become a complicated process.

In Toronto and Vancouver especially, homebuyers need to save not just thousands of dollars but tens of thousands of dollars. For the average first-time homebuyer, this represents a daunting task and has caused first-timers to get creative with their down payment funding.

I’m no exception to this rule. I’m actively saving for a down payment, and although I don’t live in Toronto or Vancouver, I’m still tasked with accumulating tens of thousands of dollars for my first home. I’ve been working towards this goal for 12 months, and here are the insights I have to share about saving for a down payment.

Settle on a target amount

The first thing you need to do when saving for a down payment is to decide how much to spend on a home. If you aren’t sure what your budget should be, check out a mortgage affordability calculator and research home values in your target neighbourhood.

In my case, homes in my ideal location sell for about $300,000. I plan on buying a fixer-upper so I’m looking for a home that needs updating at a price point of around $300,000.

Using your target purchase price as a guide, decide how much you’ll need to save. In Canada, if a home’s purchase price is less than $500,000, you need to put at least 5% down. If you plan on spending more than $500,000, you’ll need to save even more. Remember that the bigger your down payment, the lower your monthly payment.

For myself, I want to buy a property worth around $300,000. I’d like to put 10% down, so I’ll need to save $30,000.

Factor in closing costs

When you buy a home, you need to worry about more than just the down payment. You also need to pay closing costs. Here are some of the closing costs you may have when you buy a home:

  • Home inspection fee
  • Deposit
  • Land transfer tax
  • Legal fees and disbursements
  • Title insurance
  • PST on CMHC insurance
  • Appraisal fee
  • Property insurance
  • Prepaid utility bills
  • Prepaid property taxes

As a rule of thumb, closing costs amount to between 1.5% and 4% of the value of your home. For example, if you buy a home for $500,000, you can expect to pay closing costs ranging from $7,500 to $20,000. Make sure to factor this amount into your overall savings target.

For my $300,000 home, I can expect to pay closing costs ranging from $4,500 to $12,000. I’ll have to add that to my target down payment of $30,000 for a total savings goal of $42,000.

Tap your down payment resources

Once you know how much you need to save, it’s time to draw on your available resources to come up with your down payment. Here are several different potential down payment sources:

Personal savings—Use money you’ve saved in GICs or high-interest savings accounts for your down payment.

Home Buyers’ Plan (HBP)—If you’re a first-time homebuyer, you may withdraw up to $25,000 from your RRSP under the Home Buyers’ Plan. If you’re buying with a spouse or common-law partner who’s also a first-time buyer, you can add another $25,000 for potential funding up to $50,000. It’s important to note that you’re borrowing this money and you’ll need to pay it back in full. Two years after your purchase, you need to start making annual payments over a 15-year period. If you don’t pay the money back by each year, you’ll be taxed.

Gifts from family members—A recent BMO survey showed that 42% of first-time homebuyers expect their parents or other family members to help them with their down payment. If you have generous relatives who can gift you a down payment, consider tapping them as a resource.

If you’re still short after you’ve tapped all of your personal savings, monetary gifts from family members, and your RRSP, you’ll need to save the difference.

In my case, I didn’t have any personal savings or money from my RRSP that I was comfortable using for a home down payment. I also didn’t get any help from my parents so it’s up to me to save $42,000 on my own.

Make a plan to save the rest

If you’re like me, and the resources above didn’t yield enough money for your home down payment, then it’s time to make a plan to save the rest yourself. Saving is the hard part because it takes discipline and time.

The first thing you need to do is figure out how much you will save each month to make your goal a reality.

I made a plan to save $500 per month to start. Every time there was extra room in my budget for savings I added that extra money to my home down payment savings. I’ve been saving for one year, and through incremental increases I’m now putting $760 per month towards my house down payment.

You should also put windfall money towards your home down payment. For me, any extra money from additional paycheques, tax refunds, or freelancing goes directly to my down payment fund.

It’s been about 12 months since I started saving and using this method. So far, I’ve managed to put away $21,000.

Settle in for the long term

Depending on the size of the down payment and how much help you receive from outside sources, saving for a down payment can take years. If this is the case for you, be prepared. Saving a significant amount of money over an extended period of time can be demoralizing, frustrating, and just plain dull.

But also remember that it’ll be worthwhile to make a larger down payment and you’ll be able to build equity faster. Don’t jump into homeownership before you’re ready. Instead, take your time, save a substantial down payment, find a realtor and mortgage broker you trust and eventually you’ll find a home that is right for you.

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Flickr: Alex Vakulenko