Here’s How to Save for a House Down Payment in Canada in 2023
In 2023, saving money for a house down payment has become even more difficult than before. If people needed to cut costs before the crisis, now they need to be even more stringent with their spending, plus they need a whole new level of financial education.
To help you out, we’ve put together a number of tips on how to save money for your home down payment in 2023. Although these tips cater to Canadian residents, they can partially be used by people residing in other countries, including the US. Additionally, you can use these to save money not just for a home down payment, but also for any other financial purpose, such as an RV, car, vacation, or even for paying off your debt.
Many people who have used these money-saving tips before found out that, when they managed to achieve their first goal, they’ve also managed to achieve other goals as well. It all depends on how motivated a person is to achieve his or her financial goals.
Without further ado, let’s dive deep into these tips and get two steps closer to buying the house of your dreams.
Figure Out How much you’ll Have to Save
The first and most important step in the process of saving money for a house down payment is to determine the exact amount you need to raise. Ideally, you want to save at least 20% of the total price of the property. With a bigger down payment, you can increase your chances of mortgage approval. Additionally, you’ll get a better offer from the bank with a lower monthly interest rate.
By steering more money into your home down payment, you can avoid the costly payment of the Canada Mortgage and Housing Corporation insurance aka CMHC insurance. For example, if you put up under 20%, your lender will require you to pay CMHC insurance. This fee protects the lender should you fail to make your monthly payments.
In Canada, the average down payment ranges from 5% to 20%. However, with the average home price up by over 15% since last year, prospective homeowners need to raise quite a lot of money. If, for example, you want to buy a house worth over $1 million, you’ll have to save over $200k. However, if you simply want to relocate from your one-bedroom apartment rent to a new home, and you’re sure you’ll spend around $400k on it, you’ll still have to save over $20k.
Always determine the amount you want to save before starting to actually save for a new home. It’s quite a huge difference between saving $20k and $200k. With a clear goal in mind, you’ll be able to create a monthly saving plan that you can stick to.
Determine your Timeframe
Next, you want to make sure that you set up a monthly savings plan. It all depends on how much you can set aside on a monthly basis and the total amount you have to save. This plan should also be based on the actual date you wish to buy your new home.
Let’s say that within a 2-year timeframe, you want to purchase your new $400k worth home in Montreal. For that, you need to save a total of $20k during this period of time. That’s around $900 each month in savings.
Now, if you cannot save more than $500 a month no matter what you do, you have two options: either purchase a cheaper home or simply extend the duration of time to over 3 years and half.
At the same time, you might be able to put aside only $500 in the first few months, but then you’ll be able to save over $1,000 a month because of certain contracts you’ve landed. You can save more in certain months and less in others, but you should have the whole amount after the timeframe has passed.
Of course, setting up this timeframe is entirely up to you. You can extend it whenever you want. In the end, you can’t put too much of a strain on your monthly budget. It’s important to still enjoy your life while saving for a new home.
Embrace a Side Hustle & Increase your Salary
One of the best ways to save money for a down payment in this economy is to make more money. For instance, if you want to reach a down payment of over $100k within just a few years on a modest salary, you need to do one of the following: embrace a side hustle or increase your salary.
To increase your actual salary, you need to become an expert in what you do. More than that, you need to know how to sell your skills. Either ask for a raise or find a new job where the company is willing to pay you more for your skills. You need a certain work of self-advocacy to convince your manager that you deserve a raise.
Keep a steady eye on the employment market and do not be afraid to find a new workplace if you think you are underpaid. The market is moving incredibly fast, and you should never spend too much time in one place. In 2020, the average person spent less than 2 years at a company.
As for a side hustle, you can find tons of amazing opportunities online. You can do basically anything on sites like Fiverr.com or PeoplePerHour. If you are passionate about a certain activity, you can monetize it online. There’s always be a market full of people in need of the services you have to offer.
For example, if you love writing, you can earn around $100 a week in your spare time, if not more. There are hundreds of sites out there that offer freelancing services. However, if you’re an IT geek, you may be able to earn over $1,000 a week performing complex integrations and creating websites. You could even give up your actual job and make a switch to becoming a full-time freelancer.
There are many other options to make money online. You can discover more side hustle ideas for Canadians online and choose just the right one for you.
Cut your Expenses
Another method to save more money for your home down payment is to spend less on basic items. For that, you need to take a closer look at the top spending categories. In Canada, this is probably rent, food and transportation. You might also have hobbies and extravagant expenses at the top of your list. Once you pinpoint those categories, it is time to start cutting.
Start with rent. If it’s too high, you can make certain “arrangements” for a few years. For example, instead of paying $2,000 every month in your apartment, you could find a roommate and only pay $1,000. You could also move into a friend, a relative and even your parents, paying them half of the amount you already pay. With just your rent, you can save over $1,000 a month for your future home.
In terms of transportation, you could definitely consider alternate means of transport. If you only move around in your own car, maybe you should consider selling it and switch to a bike, bus or subway. By going car-free, you can spend over $5,000 a year. If you also sell your car, you could easily make an extra $10k to set aside for your home.
As for food and other extravagant purchases, you can certainly save up to $100 a week, if not more. Instead of ordering food from that select restaurant, you can purchase a high-end food cooker and grill and start preparing your own delicious foods at home. You can also invest in a credit card that gives you cashback on your purchases. Let’s not forget about food coupons and other free tools you can use to cut your expenses.
Wipe out your Debt
If you want to save money unhindered, you should start it after you have wiped out your debt. Once you start saving, it will be hard to focus on both paying back your debt and setting money aside for a down payment. Moreover, once you purchase a new home, you’ll be looking at around 25 years of continual debt.
Clean up some of the consumer debt you have and focus on being free of high-interest debt. You should have no credit card interest when you start setting money aside. Consider using a consolidation loan or leveraging the benefits offered by a balance transfer loan.
Store your Money using the right Option for you
To gain the peace of mind that the money you set aside is safe, you also need to consider the place where you’ll save the funds. You want to make your savings the #1 priority on your list. To supercharge your savings, you can choose between a high-interest savings account and a GIC. Let’s explore the differences between the two.
A high-interest savings account offers you an interest rate of around 3% on a yearly basis, which is more than enough to break even with the rise of inflation. Conversely, a GIC, or Guaranteed Income Certificate), allows you to lock your money for a pre-definite period of time, with an even higher interest rate that can get as high as 5%.
However, note that you cannot withdraw your money before the actual term expires. If your GIC’s term is 5 years and you want to buy your home sooner than that, you won’t be able to do that. If you need flexibility, a high-interest savings account is the right option for you. On the other hand, if you’re pretty sure that you’ll need more than 5 years to raise money for a new home, you should probably choose a GIC.
Deciding Between an RRSP and TFSA
Two other instruments you have at your disposal when putting money aside for a new home are RRSP (Registered Retirement Savings Plan) and TFSA (Tax-Free Savings Account). If you are a first-time homebuyer, you can definitely leverage the Home Buyer’s Plan (HBP). Under HBP, you are allowed to withdraw a hefty amount of $25k from your RRSP. In case you are buying a home with your spouse or partner, you can withdraw $50k.
If the home you’re buying is valued at under $500k, you can pay the 5% down payment with just your HBP benefits. However, the money that you borrow has to be repaid within 15 years. Only leverage this RRSP program if you’re confident that you’ll be able to return the amount you borrow within the timeframe.
On the other hand, the TFSA is perfect for Canadian residents who have already bought a home or have maxed out their HBP. You can hold a GIC inside your TFSA and withdraw money without paying any taxes.
While RRSPs have been around since the 90s, TFSAs have only been launched in 2009 as a response to the crashing housing market. Basically, the difference between the two is that you have to pay taxes when withdrawing money from an RRSP, while you have to pay no tax when taking your money out of a TFSA.
The Next Steps
After you have implemented all of these tips or most of them into your daily life, you can rest assured that most of the planning is done. All that is left is to stick to your plan and start saving money for your dream home.
The journey might take longer than you expect, especially with so many uncertainties around the corner. However, rest assured that you’ll get there in the end. Make the most out of all the financial tools available to you, including TFSA and RRSP, and leverage the benefits offered by GICs or high-interest savings accounts.
Above all else, remember to cut your expenses and be mindful of how you spend your money. Capitalize on cashback credit cards and do not hesitate to ask for a raise and cumulatively embrace a side hustle. Do all that and you’ll definitely be able to save those 5%, 10% or 20% you need for a down payment for your future home.