5 min read

how to save for a house

Written By

Clay Shiffman

Saving for a house is one of the most significant financial goals many Canadians aspire to achieve. Whether you are a first-time homebuyer or looking to upgrade to a larger property, homeownership requires careful planning, disciplined saving, and a thorough understanding of the Canadian real estate market.

Explore effective strategies and practical tips to help you save money for your dream home. From setting a realistic savings goal and exploring various savings accounts to understanding government assistance programs and managing debt, this guide provides the knowledge and tools to turn your homeownership dreams into reality.

What is a down payment?

A down payment is an initial, upfront payment made when purchasing real estate, representing a percentage of the total purchase price paid out-of-pocket by the buyer. This payment significantly impacts the amount that needs a mortgage loan.

In Canada, the required down payment varies with the home price: 5% for homes up to $500,000, an additional 10% for any portion between $500,000 and $1 million, and 20% for homes over $1 million. For example, a $600,000 home would require a $35,000 down payment. The down payment size affects monthly mortgage payments and overall interest costs, with larger down payments leading to smaller loans and lower payments.

What is a mortgage?

A mortgage is a loan specifically designed for purchasing real estate, where the property itself serves as collateral for the loan. If the borrower fails to make the required payments, the lender has the legal right to take possession of the property through a process known as foreclosure.

Mortgages typically involve long-term repayment plans, often ranging from 15 to 30 years, with the borrower making regular monthly payments that cover both the principal amount borrowed and the interest charged by the lender. The interest rate can be fixed, remaining the same throughout the loan term, or variable, fluctuating based on market conditions.

The mortgage process includes several steps, such as getting pre-approved, choosing a suitable mortgage product, and completing a home appraisal and inspection. Mortgages are crucial for homeownership, enabling individuals to buy property without paying the full purchase price upfront. Understanding the terms and conditions of a mortgage, including the interest rate, repayment schedule, and any additional fees, is essential for managing this significant financial commitment effectively.

The minimum down payment required for a house

In Canada, the minimum down payment required for a house depends on the property purchase price. Here are the specific requirements:

  1. For homes priced up to $500,000: The minimum down payment is 5% of the purchase price. For example, buying a home worth $400,000 requires a down payment of $20,000.

  2. For homes priced between $500,000 and $999,999: The minimum down payment is 5% of the first $500,000 and 10% of the portion of the purchase price above $500,000. For instance, if the home costs $700,000, you would need a down payment of $25,000 (5% of $500,000) plus $20,000 (10% of $200,000), totalling $45,000.

  3. For homes priced at $1 million or more: The minimum down payment is 20% of the purchase price. For example, if the home costs $1.2 million, the required down payment would be $240,000.

These requirements ensure that buyers have some equity in the property and help protect lenders by reducing the risk of default. Additionally, homes purchased with less than a 20% down payment require mortgage default insurance, which protects the lender in case the borrower fails to make mortgage payments.

How to save for a house

Set a clear goal

Setting a clear goal is the foundation of any savings plan. Start by researching the housing market in your desired area to determine the price range of the homes you’re interested in. It gives you a concrete figure to work towards. Once you know the cost, decide on the down payment percentage.

A conventional mortgage loan typically requires a 20% down payment, but loans are available with as little as 3-5% down. A smaller down payment typically requires private mortgage insurance (PMI), which adds to your monthly payments. Knowing the exact amount you need helps you set a realistic and achievable savings target.

Create a budget

Creating a budget is essential for managing your finances and identifying how much you can save each month. Start by tracking your monthly gross income and expenses for a few months to get a clear picture of where your money is going. Use a budgeting app or a spreadsheet for this task! You can even check out our article on the best budgeting templates to help you out with your search.

Once you have a comprehensive list, categorize your expenses into essentials and non-essentials. Look for areas where you can cut costs, such as dining out, entertainment, or subscription services. Redirect these savings towards your house fund. A well-structured budget helps you save and ensures you live within your means. You can use your regular bank account or a separate savings account dedicated toward a down payment fund to ensure you're putting enough funds toward your purchase.

Open a dedicated savings account

Opening a dedicated savings account for your house fund helps you keep your savings separate from your regular spending money, making it less likely that you’ll dip into these funds for everyday expenses. Opt for a high-yield savings account to take advantage of higher interest rates, which can help your savings grow faster. Some financial institutions offer interest on a chequing account, but you'll save faster with a dedicated savings account.

To make saving easier, set up automatic transfers from your checking account to your dedicated savings account. A portion of your income is saved automatically each month, ensuring consistent progress toward your goal.

Reduce your debt

Reducing existing debt is crucial because high-interest debt can significantly hinder your ability to save. Focus on paying off debts with the highest interest rates first, such as credit card balances. It reduces the interest over time, freeing up more money to save for your house.

Additionally, consider consolidating your debt if it will lower your interest rates and monthly payments. Lower monthly debt payments mean you can allocate more money towards your savings without straining your budget.

Increase your income

Increasing your income can accelerate your savings process. Look for opportunities to earn extra money, such as taking on a part-time job, freelancing, or starting a side hustle that leverages your skills.

Additionally, consider asking for a raise at your current job if you're due for one. When requesting a raise, be prepared to present a strong case, including your accomplishments and contributions to the company. You can direct any additional income towards your house savings to reach your goal faster.

Save windfalls

Saving unexpected windfalls can significantly boost your house funds, such as bonuses from work, tax refunds, monetary gifts, or any other unexpected income. Instead of spending this extra money, deposit it into your dedicated savings account.

Another way to generate additional funds is by selling items you no longer need or use. Host a garage sale or sell items through online platforms. These one-time boosts can make a substantial difference in reaching your savings goal sooner.

Investment wisely

If your timeline for buying a house is flexible, consider investing a portion of your savings to potentially earn higher returns. For short-term goals, you may consider low-risk investment options like high-yield savings accounts, certificates of deposit (CDs), or short-term bond funds. If your time horizon is longer, you might consider investing in a diversified portfolio of stocks and bonds.

Assess your risk tolerance and investment options carefully. Ensure you’re taking full advantage of employer-sponsored retirement accounts and matching contributions, which can provide significant long-term benefits.

Research assistance programs

There are numerous programs designed to help first-time homebuyers with their purchase. Research federal, provincial, territorial, and local programs that offer grants, loans, or other forms of assistance. These programs can help with down payments and closing costs, reducing the amount you need to save.

Stay disciplined

Staying disciplined and motivated over a long period can be challenging, but it’s essential for reaching your savings goal. Set smaller milestones within your larger goal and celebrate when you reach them. For example, if your ultimate goal is to save $40,000, celebrate when you reach $5,000, $10,000, and so on.

Visualizing your goal can also help keep you motivated; keep pictures of your dream home or the neighbourhood you want to live in where you can see them regularly. These visual reminders can inspire you to stay on track and continue saving diligently.

Types of savings accounts

When saving for a house, there are several types of savings accounts in Canada, and investment vehicles can help you reach your goal. Each type offers different benefits, so it’s important to choose the one that aligns with your financial strategy and timeline. Here are some of the most effective savings accounts for this purpose.

High-Interest Savings Account (HISA)

The difference between a high-interest savings account vs. a savings account is a HISA offers a higher interest rate. HISAs are ideal for short to medium-term savings because they provide a safe place to store money while earning interest. Many banks and credit unions in Canada offer HISAs, and they typically come with no monthly fees and easy access to your funds.

Many banks and credit unions in Canada offer HISAs, and they typically come with no monthly fees and easy access to your funds. Weigh the pros and cons of high-yield savings accounts to determine whether it's the right vehicle to help you save for a house. Your interest is calculated monthly or yearly, and you earn compounding interest to accelerate your savings.

Tax-Free Savings Account (TFSA)

A Tax-Free Savings Account is a versatile savings vehicle that allows your money to grow tax-free. You can contribute up to the annual limit and withdraw funds without tax penalties. TFSAs can hold various investments, including cash, GICs, mutual funds, and stocks, making them suitable for short-term and long-term savings goals. The flexibility and tax advantages make TFSAs an excellent option for saving for a house.

Registered Retirement Savings Plan (RRSP)

While primarily intended for retirement savings, an RRSP can also be used to save for a house through the Home Buyers’ Plan. The HBP allows first-time homebuyers to withdraw up to $35,000 from their RRSP ($70,000 for couples) to purchase a home. The withdrawn amount must be repaid to the RRSP over 15 years. Contributions to an RRSP are tax-deductible, which can reduce your taxable income and potentially provide a tax refund that you can also put toward your savings.

Guaranteed Investment Certificate (GIC)

A Guaranteed Investment Certificate is a low-risk investment that offers a guaranteed return over a fixed period, ranging from a few months to several years. GICs are a good option if you have a specific timeline for your home purchase and want to ensure your savings grow without risk. However, GICs typically offer lower returns than other investment options and may have penalties for early withdrawal.

First Home Savings Account

Introduced in recent years, the First Home Savings Account combines features of both TFSAs and RRSPs specifically for first-time homebuyers. Contributions to an FHSA are tax-deductible, like an RRSP, and withdrawals for a home purchase are tax-free, like a TFSA. The account has an annual contribution limit and a lifetime maximum, providing a tax-efficient way to save for your first home.

Investment accounts

For those with a longer timeline and higher risk tolerance, an investment account holding a diversified portfolio of stocks, bonds, or mutual funds can offer higher potential returns than traditional savings accounts. While these accounts do not have the tax advantages of TFSAs or RRSPs, they can significantly grow your savings if you’re planning to buy a house several years later. Be mindful of market volatility and ensure you’re comfortable with the level of risk.

Home buying payment assistance programs

In Canada, there are several programs designed to assist first-time homebuyers, making the process of purchasing a home more accessible and affordable. One key program is the First-Time Home Buyer Incentive (FTHBI), which is a shared-equity mortgage with the Government of Canada.

Through this program, the government provides 5% or 10% of the home’s purchase price towards a down payment, reducing your mortgage and monthly payments. You must repay the incentive within 25 years or when you sell the home, whichever comes first.

Another useful program is the Home Buyers’ Plan (HBP), which allows first-time homebuyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to put towards the purchase of a home. If you’re purchasing with a spouse or partner, they can also withdraw up to $35,000 from their RRSP, for a total of $70,000. The withdrawn amount must be repaid into the RRSP within 15 years to avoid tax penalties.

Additionally, there are provincial and territorial programs with various forms of assistance. For instance, Ontario’s Land Transfer Tax Rebate provides up to $4,000 back to first-time homebuyers to help with land transfer tax costs. Similarly, British Columbia’s First-Time Home Buyers’ Program offers a full or partial exemption from the property transfer tax on homes valued below a certain amount.

Understanding and utilizing these programs can significantly reduce the financial burden of buying your first home in Canada. It’s advisable to research specific criteria and benefits of each program to determine which ones you qualify for and how they can best support your home-buying journey.

Understanding housing costs

Understanding the costs of buying a house in Canada is crucial for budgeting and planning. The first step in understanding housing costs is assessing the purchase price. The cost of homes varies widely depending on the location. For instance, major cities like Toronto and Vancouver typically have higher prices than smaller cities and rural areas.

Stay updated on market trends as prices fluctuate based on economic conditions, interest rates, and housing supply. Researching the current real estate market in your desired area will give you a clear idea of the average home prices you can expect.

A significant portion of your housing cost is the down payment. You typically need 20% of the purchase price for a conventional mortgage. However, if you opt for a down payment of less than 20%, you will need mortgage default insurance. This insurance protects the lender if you default on your loan. Understanding these requirements helps you determine how much you need to save initially.

When you have a down payment of less than 20%, mortgage default insurance, also known as CMHC insurance (provided by the Canada Mortgage and Housing Corporation), is required. The cost of this insurance ranges from 0.6% to 4.5% of the loan amount and can be added to your mortgage or paid upfront. This insurance adds to your overall home purchasing cost but is necessary for those who cannot afford a 20% down payment.

Closing costs include various legal and administrative fees. Land transfer tax is a significant part of these costs and varies by province, usually as a percentage of the purchase price. Additionally, you'll need to pay for legal fees, typically ranging from $500 to $1,500, covering the cost of hiring a lawyer to handle the transaction's legal aspects.

Title insurance, which costs between $200 and $400, protects against title fraud and issues with property ownership. A home inspection is advisable to ensure the property's condition. Some mortgage lenders require an appraisal fee, usually between $300 and $500.

Once you purchase your home, you need to budget for moving costs. If you hire professional movers, costs can range from $500 to several thousand dollars, depending on the distance and the amount of belongings. Alternatively, a DIY move, which involves renting a truck and doing the labour yourself, can be cheaper but requires significant effort. Planning for these costs ensures a smoother transition to your new home.

Immediately after buying a home, there are often additional expenses for repairs and renovations. Budget for immediate repairs needed after moving in and renovations you plan to undertake. These costs can vary widely depending on the extent of the work and the materials used. Additionally, you may need new furniture and appliances. Budgeting for these initial expenses ensures you can make your new house comfortable and functional.

Owning a home comes with ongoing costs that you need to budget for. Property taxes, which vary by municipality, typically range from 0.5% to 2.5% of the property's assessed value annually. Home insurance, which protects against damage and loss, usually costs between $800 and $1,500 yearly.

Monthly utilities, including electricity, water, heating, and internet, can add up to $200 to $500 per month. Additionally, regular maintenance and repairs, estimated at 1-3% of the home’s value annually, are necessary to keep your home in good condition.

Factors that influence interest rates on mortgages

Domestic and international factors influence Canadian mortgage rates.

Bank of Canada's policy rate

The Bank of Canada (BoC) plays a critical role in determining mortgage interest rates through its policy or overnight rate. It is the rate at which major financial institutions borrow and lend overnight funds among themselves. When the BoC adjusts the policy rate, it directly influences the interest rates financial institutions charge on mortgages.

A higher policy rate typically leads to higher mortgage rates, while a lower policy rate results in lower mortgage rates. The BoC changes its rate based on economic conditions to control inflation and stabilize the economy.

Economic indicators

Several economic indicators influence mortgage rates in Canada. When inflation is high, the Bank of Canada may increase the policy rate to cool down the economy, leading to higher mortgage rates. Strong economic growth can lead to higher interest rates as demand for borrowing increases. In addition, higher unemployment can lead to lower interest rates as the BoC aims to stimulate economic activity.

Bond yields

Mortgage rates are often influenced by the yields on government and corporate bonds, particularly long-term bonds like the 5-year Government of Canada bond. When bond yields rise, mortgage rates tend to follow because banks' borrowing costs increase.

Conversely, when bond yields fall, mortgage rates typically decrease. Bond yields fluctuate based on investor sentiment and economic conditions, including expectations of future inflation and interest rates.

Housing market conditions

The state of the housing market itself can impact mortgage rates. In a booming housing market with high demand, lenders might offer more competitive rates to attract customers. In a slow market, rates might increase due to the higher risk associated with lending.

Credit market conditions

The overall credit market conditions, including the availability of funds for lending, affect mortgage rates. In times of financial stability and abundant credit, mortgage rates tend to be lower. During financial crises or periods of tight credit, rates can rise due to the increased cost of securing funds.

Lender competition

The level of competition among lenders also plays a significant role in determining mortgage rates. When competition is fierce, lenders may lower their rates to attract more borrowers. Conversely, in a less competitive environment, rates may be higher.

Borrower's financial profile

Individual borrower characteristics significantly influence the interest rate offered. Borrowers with higher credit scores typically receive lower interest rates because they are at a lower risk, while people with lower scores have more credit risk for lenders and have more chances of missing the monthly mortgage payment or defaulting.

A larger down payment reduces the lender's risk and can result in a lower interest rate. A lower debt-to-income ratio is also more favourable and can lead to better mortgage rates for the borrower.

Type of mortgage

Fixed-rate mortgages typically have higher rates than variable-rate mortgages because they offer stability and predictability. Variable-rate mortgages may offer lower interest rates initially but can change based on fluctuations in the BoC's policy rate and other factors.

Global economic conditions

Global economic conditions and events can cause a ripple effect on Canadian mortgage rates. For example, economic downturns or financial crises in major economies can lead to lower rates as investors seek safe havens in bonds, driving yields down. Conversely, robust global economic growth can push rates higher.

Government policies and regulations

Government policies and regulations, such as changes in mortgage lending rules and housing policies, can influence interest rates. For example, stricter lending rules can reduce the number of qualified borrowers, leading to lower demand for mortgages and potentially lower rates.

Do credit scores impact mortgages?

Credit scores play a pivotal role in determining the terms and conditions of a mortgage in Canada. One of the most significant impacts is on the interest rate offered by lenders. Borrowers with higher credit scores generally receive lower interest rates because they are perceived as less risky.

A lower interest rate can save thousands of dollars over the life of a mortgage, making homeownership more affordable. Conversely, those with lower credit scores are often subject to higher interest rates to compensate for the increased risk of default. This higher cost of borrowing can make monthly payments more expensive and the overall loan more costly.

The credit score also influences the approval process for a mortgage. Lenders set minimum credit score requirements, which vary depending on the type of mortgage. For example, conventional mortgages usually require a higher credit score, often around 680 or above.

Government-insured mortgages, such as those insured by the Canada Mortgage and Housing Corporation (CMHC), may accept scores as low as 600. Meeting or exceeding these credit score thresholds increases the likelihood of mortgage approval and may provide access to better loan terms.

Additionally, the amount a borrower can qualify for is often linked to their credit score. Lenders might be willing to approve larger loan amounts for those with higher credit scores. A high credit score facilitates mortgage approval and expands your borrowing capacity, allowing you to consider more expensive properties. On the other hand, lower credit scores can limit the amount lenders are willing to offer, narrowing your home-buying options.

Do credit scores impact down payments?

For high-ratio mortgages, where the down payment is less than 20%, having a good credit score is crucial to qualify for mortgage default insurance. This insurance is mandatory in Canada for high-ratio mortgages and protects the lender if the borrower defaults. Borrowers with high credit scores are more likely to be approved for these mortgages, enabling them to make smaller down payments.

For those with lower credit scores, lenders might require a larger down payment to mitigate the risk. Instead of the minimum 5% down payment, a borrower with poor credit might need to provide 10% or more. This higher upfront cost can be a significant barrier to homeownership for individuals with lower credit scores.

Credit scores also matter for access to special mortgage programs and benefits. Certain first-time homebuyer programs and other assistance options often have credit score requirements. High credit scores can help you qualify for these programs, which typically offer lower down payments and more favourable mortgage terms. Therefore, maintaining a good credit score can provide access to additional resources that make purchasing a home more achievable and affordable.

KOHO can help you kickstart your financial journey towards home ownership

Are you seeking a digital solution to manage your finances effectively as you save towards owning a home? KOHO offers many plans for spending and saving. The KOHO virtual credit card provides a seamless way to make payments online and in stores without the need for a physical card. It also offers cash back rewards on every purchase, helping you accumulate savings faster.

With the KOHO app, you can instantly access your virtual card and benefit from robust security measures against fraud and cyber threats. This virtual card is particularly beneficial for planning your future home purchase or managing expenses while saving up.

In addition to the virtual card, KOHO offers Cover, an overdraft protection coverage that provides up to $250 in interest-free cash advances during emergencies, ensuring you stay on track with your savings goals.

Furthermore, KOHO supports your financial journey by helping you build credit, which is crucial for qualifying for mortgage loans and other home financing options. Monitor your credit profile with a free credit score to ensure you're strengthening your profile. Their high-interest savings account allows you to earn interest with competitive rates on your savings, accelerating your progress towards homeownership.

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Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!