This post was first published on April 22, 2019, and was updated on May 12, 2023.
Saving up for a first home is a daunting job, but it can be done if you follow the right strategy. Whether you’re just getting started or you’re in the middle of saving up for a place to call your own, here are some tips to make the process a little bit easier, and a little bit more enjoyable.
Do your research as early as possible
Saving for a first home is a big job but if you’re only working toward saving a big pile of cash, you might end up feeling like you’re spinning your wheels. As early as you can, start doing some research and come up with a rough idea of what you’d like to accomplish and how much you need to save.
Start by looking at real estate listings in the area where you’d like to buy. For an accurate picture of what you can expect to spend, use websites like Zoocasa to find the sold prices for homes that are similar to what you want.
Home prices are only part of the equation, however. You’ll also want to do some research with a mortgage affordability calculator to find out how much you can actually afford to spend, and how the size of your down payment will affect your monthly payments.
Check out the best current mortgage rates
Take 2 minutes to answer a few questions and discover the lowest rates available
If you’re in a situation that can make it harder to get a mortgage, like if you have bad credit or you’re self-employed, this might be a good time to check in with a mortgage broker as well. Mortgage brokers work to compare mortgages on your behalf, and they can give you a clear picture of how much you can afford.
Set your time horizon
Knowing the approximate down payment you’re working toward can help you set a realistic savings goal, but having a set timeline can help light your savings fire.
Let’s say you’re planning to spend $600,000, and need $40,000 to cover your minimum down payment, closing costs and moving expenses. Saving that much money can feel like an impossible task, too big to take the first step.
But if you add in a timeline, your job becomes much more clear. To save $40,000 in five years, you’ll need to put away $667 per month.
Setting a timeline can also help you make sure your goals are reasonable and realistic. If you’re living with your family and have a full-time job, saving $667 per month might be easily doable.
But if you’re renting and you’re self-employed, even half of that might be a stretch. Depending on your situation you might need to take longer to save or re-evaluate the kind of home you want to buy in order to make it work.
Save like you own the place
Owning a home is expensive. There are lots of ongoing costs that include your mortgage, property taxes, heating costs and utility bills (and if you’ve been comfortably helping yourself to your parents’ fridge as well, go ahead and add in groceries). A great way to save money and get accustomed to the reality of homeownership is to save at least as much as you expect your home to cost you.
For example, if you’re planning to buy a $600,000 home with a 5.9% down payment, your monthly payment with today’s best mortgage rate of 4.29% (as of May 12, 2023) will be $3,182. Add in $250 per month for property taxes, $100 for heating, $100 for other utilities, and $600 for maintenance (this could take the form of fees for a condo or your own expenses for a freehold home). That totals $3,432 per month in carrying costs. Subtract your current living expenses, and that’s the minimum amount you should be saving.
If the number you’re left with is way too high, that’s a sign that you need to adjust your plans. You can make lifestyle adjustments to free up more cash for savings, or plan to spend less on your home. It might be a tough pill to swallow, but I recommend this strategy because it’s better to find out that you can’t afford your home before you buy it than after.
Stress test your affordability
As of January 1, 2018, all borrowers taking out new mortgages – whether they’re high- or low-ratio – are required to pass the mortgage stress test. This is required by law for all mortgages offered by federally-regulated financial institutions such as banks, credit unions, and other alternative lenders.
The mortgage stress test criteria requires borrowers to prove they could carry their mortgage payments at either OSFI’s Mortgage Qualifying Rate (MQR) of 5.25%, or their contract rate plus 2%, whichever is higher (only the latter currently applies to all stress tested mortgages as today's mortgage rates are all priced above 3.25%, rendering the MQR obsolete).
That means if you qualify for a five-year fixed mortgage rate of 4.29% from your lender, you’d actually need to prove you could make your mortgage payments at a rate of 6.29%. This can have a significant impact on how much mortgage you’d qualify for; using the affordability scenario in the above paragraph, a borrower would need to pay $3,859 monthly with a rate of 6.29%. That’s a difference of $677.
Use tools designed to help first-time homebuyers
There are programs in place for first-time homebuyers to save for a first home. Use them wisely.
The First Home Savings Account: The newest tool designed to help first-time buyers save is the First Home Savings Account; launched by the federal government on April 1, 2023, this account combines the tax-deductible features of an RRSP with the some of the flexibility of a TFSA. Savers can deposit up to $8,000 annually into the account, on which they’ll receive a return, up to a lifetime maximum of $40,000. Income earned within the account is also tax-sheltered. The funds can be removed without tax penalty for the purchase of a first home within 15 years of opening the account, or transferred to an RRSP, also at no tax penalty. You can learn more about the First Home Savings Account in the helpful video below, as well as on our First Home Savings Account landing page.
Another option is the Home Buyers’ Plan (HBP): This program allows you to withdraw money from your RRSP, tax-free, to buy a first home. Under new rules, you can withdraw up to $35,000. The catch is you have to pay the money back to your RRSP over 15 years – so a $35,000 withdrawal will turn into $195 per month in forced retirement savings.
The beauty of the HBP is that you can defer the income tax on the money you save to buy a first home. You can save your money directly to your RRSP, get a big tax refund for having done so, and then take the money back out to buy your home without penalty. You then have a great incentive to make regular RRSP contributions, and in 15 years you’ll have a decent start on your retirement savings, and a home.
The wrinkle with this to be aware of is that you can’t withdraw the money from your RRSP to buy the home until after you’ve entered into an agreement to buy the home. So make sure you keep some cash outside of the RRSP that you can use for a deposit when you buy the home. For this portion of your savings, a high-interest savings account will help your savings grow while keeping it easily accessible.
Lastly, there’s another program called the First-Time Homebuyer Incentive (FTHBI). This program provides qualified first-time buyers with an interest-free loan for their down payment, which helps decrease their regular mortgage payments. The incentive contributes up to 10% of the total cost of the home if it's a new build, or 5% for a resale, which you’ll need to pay back within 25 years.
By delaying the repayment of this interest-free amount, first-time homebuyers can save a significant amount of money over the course of their mortgage. However, the catch is that homeowners share the equity of their home with the federal government, up to a 8% loss or gain per annum. For this reason, the FTHBI hasn’t been hugely popular, especially in Canada’s most expensive housing markets.
The bottom line
There’s more to life than saving money. Many personal finance writers have made a name for themselves by saving to the extreme, making huge sacrifices in the name of getting out of debt, paying off their mortgage or growing their personal net worth. These are entertaining and admirable examples, but trying to emulate them can cause you to pull out all your hair.
If working two jobs and renting out every room in your apartment and sleeping on the couch so you can buy a home in a year gives you satisfaction, go for it. Otherwise, keep your goals reasonable and leave yourself some slack to enjoy your life. There’s no reason you can’t save for a home, and take a vacation, and enjoy the occasional latte or night out.