How can you save money and buy a new house in Canada?

A home that one can call their own is a dream of many Canadians. If you want to buy a home in Canada, you must be aware that a significant amount must be paid as a down payment before making the purchase.
An average Canadian house is priced at CAD 700,000, and most lenders will require a downpayment of a minimum of 5% and 20% of the estimated purchase price. If you would like to take a look at the minimum down payment that is expected as an average, here are the rough statistics:
1.For a property costing less than CAD 500,000, a minimum of 5% is expected to be paid as a down payment, roughly equivalent to CAD 25,000.
2. For a property between CAD 500,000- and CAD 999,999, a minimum of 5-10% is expected to be paid down. This is further broken down as 5% of the first $500,000 and 10% of the remaining value. Assuming the house you intend to purchase is valued at 750,000 CAD, this translates to CAD 50,000.
3. For a property valued at above a million CAD, a minimum of 20% down payment is required. It is pertinent to note that contributing anything less than a 20% down payment will require you to buy Mortgage Default Insurance. A mortgage default insurance is only applicable to houses under 1 Million CAD. Without the mortgage default insurance, the minimum down payment would roughly translate to 200,000 CAD.

How does a larger down payment help you in Canada? Though you must make a minimum down payment, a larger down payment could help you in many ways, like allowing you to qualify for a bigger or more expensive house and saving up on the interest payments and loan tenure. It also helps you save on the CHMC insurance. Depending on your down payment, a percentage of the mortgage loan insurance is calculated and added to your mortgage to be paid in a lump sum or included in the monthly payments. The CHMC insurance usually ranges between 1.70% to 3.10% of the total mortgage payment) and is a first-time home buyer incentive by the Canadian Government.

Now that it is an established fact that buying a home in Canada will need a significant amount to be paid as a down payment let us explore some methods of saving money to buy a home in Canada:

1. Your own savings:
First and foremost, cut down on unnecessary spending. Pay off small debts that you can, especially credit card debts. It does not make sense to pay interest when you might be required to make more future payments towards the housing loan. Restrict and minimize your spending on necessary things. Save every dollar and invest it towards saving the money you will need to make the down payment on the loan. Your savings could help you make a larger down payment and save on the interest component.

2. First-time Home Buyer Incentive from the Government of Canada:
It would be a good idea to consider the First time home buyer incentive sponsored by the Government of Canada. The Canadian Government provides 5-10% for anyone buying a newly constructed home and 5% for anyone purchasing a house being re-sold or a mobile./manufactured home being accepted for the first time or re-sold. In order to qualify for the program, one must have an annual income of CAD 120,000 or less. It must be noted that the mortgage and incentive amounts can be at most 480000 CAD or four times the yearly qualified income. For example, if John wants to buy a new house for 300,000 CAD, he can apply for a shared equity mortgage from the Government of Canada and receive 30000 CAD.(10% of 300,000). This would significantly reduce the amount John must borrow and the monthly payment.

3. Consider Opening a First Home Savings Account( FHSA):
This is an initiative introduced by the Canadian Government in 2023. In a First Home Savings Account, first-time home buyers can deposit up to 8000 CAD annually. This is restricted to a lifetime maximum deposit of 40000 CAD. When you make a deposit in an FHSA, it also helps you take a tax deduction on the amount deposited. If unused and not withdrawn, the amount can be carried forward to the next year, where it keeps growing tax-free and can be withdrawn when purchasing the house.

4. Registered Retirement Savings Plan (RRSP):
While a registered retirement savings plan is primarily designed to save for retirement, using a portion of your Registered Retirement Savings Plan to make a down payment toward buying a home is a good idea. The Home Buyer’s Plan allows for a withdrawal of up to CAD 35000 to be used as a down payment. An ideal combination would be using the FHSA, RRSP and your savings, if any, to make the down payment.

5. Tax- Free Savings Account(TFSA):
TFSA is a registered savings account ideal for short and medium-term financial goals. The investment returns in a TFSA are tax-free and can be withdrawn without assigning a particular reason.

Some steps to increase your savings to buy a home in Canada:
Before we begin to start saving, it is important first to determine the minimum amount that will be needed as a down payment and also take into consideration additional costs like maintenance costs, legal fees, home inspection fees, land survey fees, land transfer fees, appraisal fees, warranties and insurance.
Once we have a fair idea of how much money is required, some small changes can be made in our daily lifestyle, which will teach and promote the habit of savings, like – – Cutting down on unnecessary expenses that drain your finances, like eating out, spending on lavish and branded items when you do not need them, going on expensive vacations, etc. One must learn to prioritize what one wants to spend on versus one’s lifetime goal. Identify the areas where a cut in spending can be made.
-Tracking your monthly income and expenditure through a Budget Tracker is fantastic. Whenever you look at the numbers and are consistent enough to do so, every time you look at the increased savings, it will make you feel that you are one more step nearer to your goal.
-Pay off your existing debts. A good way to start doing so is to pay off the loan with the highest interest rate. The monthly payment you paid to pay off this debt could be saved, and another loan could be paid off in a few more months. This snowballs into you paying off your loans one by one, eventually making you debt-free and boosting your credit score.
-A good credit score helps you qualify for a good mortgage deal with a lower interest rate and gives you the flexibility and advantage to bargain with the lenders for a good deal.
-While a few things like getting rid of the extra car, cutting down on regular purchases and subscriptions and moving to a place with a significantly lower cost of living may seem understated, they actually help you as small measures that go a long way in helping you realize your dream.
-Always make it a point to share your dreams and plans with your family and friends so that they encourage and participate in your goal of savings and discourage you from making any unnecessary purchases.

CONCLUSION:
While it might seem like a daunting task to build your own savings, there are many things that can be practiced on a daily basis to ensure that you have a steady stream of savings that is flowing into your savings account and is eventually going to help you achieve the financial milestone of making the down payment for your dream home.

FAQ’s:

Q.What do I do when I find saving for a down payment to buy a house in Canada overwhelming or daunting?
If you feel that you are not making a lot of progress or savings, reach out to a professional credit counsellor at a non-profit credit counselling organization.

Q.Is the stock market a good option to invest and save money to buy a house in Canada?
Considering the volatility and unpredictability of the stock market in Canada, it is not advisable to invest money in the stock market as savings. You could earn enough money or lose money in a matter of minutes in the stock market.