When it comes to buying your first home, the first thing many people focus on is saving their downpayment. While this is not the largest financial burden of ownership, it is the first big hurdle you need to clear. Figuring out how to save a down payment can be challenging.
Before we jump into it, I want to point out that renting is totally cool. It will often even give you more money in the end than buying. However, there are a lot of non-financial considerations that make home ownership a goal for many. There’s nothing wrong with that either. Whether you choose to rent or buy is entirely up to you!
If you are leaning towards buying over renting, you’re going to need to figure out how to save a down payment. Here’s why and how to do so.
How much do you need to save a down payment?
In Canada, you need to put at least 5% down in order to buy a home. However, you’re better off saving the largest down payment you can afford. I personally suggest putting at least 10% down when you buy a home.
You will need to save anywhere from $30,000 to $100,000 for a down payment, depending on the price of your home.
The average house price in Canada is approximately $500,000. You’ll need to save $50,000 to put 10% down. You may choose to save less and buy a cheaper home or save more in order to have more equity.
A large downpayment accomplishes two other major things:
- Lowers your monthly mortgage payment. The more you put down when you buy your home, the less you’ll owe overall. This lowers your monthly mortgage payment.
- Reduces your risk to real estate market fluctuations. Over the long run, house prices mostly go up, but there are years where they are flat or even down. The larger your down payment, the more equity you have in your home right from the start. This makes you less vulnerable to ending up underwater on your mortgage.
That said, you don’t need to save a large down payment, but you’ll be happier if you do. The strategies outlined in this post will help you to save any amount, so read on!
How long will it take to save a down payment?
How rapidly you can bank the amount you need to buy your dream home depends most on your income, followed by discipline.
In general, 2 to 5 years is a typical timeline to save a down payment for a home.
However, you might need as long as 8 or even 10 years to save a down payment.
The good news is you don’t personally have to set aside every single dollar to reach your goal. Thanks to interest, dividends, and capital gains, at least part of your balance should save itself. You just have to make sure everything is in the right place. That means choosing the right accounts, investments, and tax-shelters to help your balance grow.
Keeping your down payment in cash vs. investments
How much of your money you hold in aggressive investments (and I mean the stock market, not Bitcoin) vs. how much you keep in cash depends on your savings timeline. You can begin with aggressive investments, and gradually increase your cash position as you get closer to the day you buy your first home.
For example, let’s say you’re planning to save your downpayment in 5 years. You might choose to begin with 80% of your money invested in the stock market and 20% in cash in Year 1. Over time, you will gradually modify this allocation until you have none of your money invested in the stock market and all of it in cash by Year 5 when you buy.
I personally use Questrade to manage all my investments. They have super low commissions, which means more money goes towards your financial goals and less towards fees. You can also have registered accounts with Questrade, which means this is also a good place to keep your RRSP if you plan to make use of the First-Time Home Buyer’s Plan.
You want to gradually reduce the risk of your investments until you’re in an all-cash position when you put a down payment on your home. The last thing you want is for a stock market correction to hit the week you sit down to sign your new mortgage papers.
How to Save a Down Payment in 3 Easy Steps
Making this a 3-step plan is a little misleading because you can and should do all of the steps simultaneously. Depending on where you are in your financial journey, you may already have a head start in one or two of these. In any case, consider saving your down payment a three-pronged approach.
Step 1: Save $35,000 in your RRSP
One of the best savings vehicles for your down payment is the Registered Retirement Savings Plan (RRSP). This will work two-fold to help you save for your first home:
- You will receive a tax deduction for contributing to your RRSP, which means you pay fewer income taxes during the year or you receive an income tax refund when you file your taxes. You can use this tax break to further boost your down payment fund.
- You can withdraw up to $35,000 tax-free from your RRSP for a down payment on your first home under the First-Time Homebuyer’s Plan. You have to repay this money, but since it’s a loan from yourself, you’re only repaying you!
If you’re part of a couple, you can each withdraw up to $35,000 from your RRSP under the First-Time Homebuyer’s Plan for a total of $50,000.
Your RRSP is a better place to save your downpayment than your TFSA. But it works best if your income is greater than ~$50,000. The higher your income, the greater the tax benefit to tucking away money in an RRSP. You should be saving at least 10% of your net income for retirement. If homeownership is part of your retirement plan, this is a way for these funds to do double-duty.
Important note: You will need to repay the $35,000 your borrow from yourself under the First-Time Homebuyer’s Plan. You have 15 years to repay the balance, beginning 1 year after you make the withdrawal. Make sure you factor your HBP payments into your monthly budget as a homeowner!
Step 2: Save $10,000 in cash
Cash is king, particularly when it comes to shelling out for your first home. While all of the money in your down payment will ultimately end up in cash, you do want to have some on hand right from the get-go. The first reason is that keeping some of your money out of the stock market reduces your risk of losing it all. But the second is because you might find you need cash on hand before you actually withdraw your full down payment.
- The Best High-Interest Savings Accounts in Canada
- EQ Bank Review: High Interest for the Savvy Saver
- 5 Ways to Make the Most of Your TFSA
Because buying a home comes with a host of other costs such as lawyer fees, home inspections, and so on. You need some liquid cash to pay these expenses as they come up. Right now, you can earn 1.70% interest on your cash savings with EQ Bank, which is a helluva good interest rate for your house downpayment fund!
Saving $10,000 in cash might seem a daunting task, but an easy way to think of it is to save $1,000 ten times. Need ideas? Check out:
Step 3: Invest the rest
Once your RRSP is taken care of and you’re building up your cash cushion, go ahead and invest the rest of your down payment where it can earn the highest return possible: the stock market.
Investing can be a daunting task, but there’s a number of different ways to do it. You might choose to learn how to invest yourself, let a roboadvisor do the work for you, or select a low-fee mutual fund. Whatever you choose, aim for a return of at least 5% on your money. Remember, you already have a mix of investments in your RRSP and $10,000 in cash, so you can afford to take a bit more risk here!
When it comes to saving a down payment for a house, the only things you really need are a plan and time. With those in place, the money almost saves itself 😉