How to save for your first home

Buying a first home is an exciting milestone in anyone’s life, but it can also be overwhelming — especially when it comes to socking away that all-important down payment. But it doesn’t have to be stressful. In this guide, we’ll walk you through everything you need to know about saving for a home, including strategies for determining your savings target, tools, and incentives that can assist first-time homebuyers, and tips to boost your savings.

How much do I need to save?

Before you start squirrelling away every spare penny, it’s crucial to clearly understand how much you’ll need to set aside to buy your first home. Follow these steps to come up with a realistic savings amount.

1. Determine your maximum purchase price

The first step in your home-buying journey is figuring out how much house you can afford, which, for most of us, is largely based on the amount of money a lender will provide for a home mortgage.

To assess your mortgage eligibility, lenders consider your income, debts, and credit score. In Canada, banks and other federally regulated lenders must also apply the government-mandated mortgage stress test to make sure you can afford your mortgage payments if interest rates rise in the future. To do this, they add two percentage points to the interest rate you qualify for (or use a rate of 5.25%, whichever is higher) when calculating how much money you can borrow. So, for example, if you qualify for a borrowing rate of 5.00%, the lender will use an interest rate of 7.00% to determine your maximum mortgage loan.

Quiz: How well do you know your credit score?

Some online calculators can help you crunch these numbers, which are useful for getting a ballpark figure. Speak with your bank to get an idea of how much mortgage you could be approved for.

2. Calculate your required down payment

Once you know the maximum amount you can spend on a home, it’s simple to determine the minimum down payment required. If the purchase price is $500,000 or less, the minimum down payment is 5%. For homes priced between $500,000 and $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance. Homes that cost $1 million or more require a 20% minimum down payment.

Here are a few examples:

Keep in mind that whenever your down payment is less than 20% of the home’s purchase price, your mortgage is considered considered high ratio, which means you’ll need to buy mortgage loan insurance. This type of insurance (also called mortgage default insurance) protects your lender if you default on your payments. Even though this protection is for the lender, the cost is passed on to you and is usually added to your mortgage.

As shown in the chart from the Canadian Mortgage and Housing Corp. below, premiums for mortgage loan insurance vary according to your loan-to-value ratio (LTV). LTV is the percentage of mortgage debt you take on to finance a home as compared to its purchase price. It's calculated as follows:

LTV = mortgage loan amount ÷ purchase price x 100

 

Revisiting our examples above, if you borrow $427,500 to purchase a $450,000 home (assuming a minimum down payment of $22,500), you would calculate your LTV as follows:

LTV = 427,500 ÷ 450,000 x 100

LTV = 95%

With a 95% LTV, your premium is 4% of the $427,500 mortgage loan, or $17,100, which is added to the total amount borrowed. That means your mortgage payments are calculated based on a total loan of $444,600 ($427,500 + $17,100).

Similarly, a minimum down payment of $50,000 on a $750,000 home requires a mortgage loan of $700,000, so the LTV is 93% (700,000 ÷ 750,000 x 100). That means your insurance premium is $28,000 (4% of the $700,000 mortgage loan), and your mortgage payments will be based on the total borrowed amount of $728,000.

To minimize these insurance costs, aim to save a down payment that’s between 10% and 20% of the home’s purchase price, if possible. In fact, with a down payment of 20% or more, you can sidestep this expense entirely.

3. Include additional costs of buying a home

While a down payment is usually the main savings focus for first-time buyers, other expenses should be added to your savings goal to avoid last-minute surprises. These include:

Closing costs – Buyers in Canada don’t pay realtor fees (sellers typically pay a commission that’s split between their agent and the buyer’s agent), but there are a number of other closing costs that can be sizable — about 1.5% to 4% of the property’s purchase price, including:

• Land transfer taxes – Many provinces and some municipalities charge land transfer taxes (LTT) that are based on your home’s purchase price. The rates vary wildly, so be sure to look up the rates where you’re buying. For example, the buyers of a $750,000 home in Ontario would pay $11,475 in provincial LTT, and if the property happens to be in Toronto, they’d also pay $11,475 in municipal LTT.
• Legal fees – The cost for a residential real estate lawyer to prepare and handle the paperwork to close the sale can cost anywhere from a few hundred to thousands of dollars.
• Title insurance – A one-time payment of about $300 will protect you against damages or losses from title fraud on the property.

Sales taxes on mortgage default insurance — Buyers in Ontario, Quebec and Saskatchewan who have a high-ratio mortgage must pay provincial sales tax on the mortgage loan insurance premium. Unlike the premium itself, the tax cannot be added to the mortgage loan and must be paid upfront. For example, provincial sales taxes on a $15,000 premium would total $1,200 in Ontario (8%), $1,496.25 in Quebec (9.975%), and $900 in Saskatchewan (6%).

Property taxes – Municipalities determine their own property tax rates, so be sure to find out what the rates are in your desired neighbourhood and plan accordingly.

Insurance – Homeowner’s insurance, which can cover your property from theft, loss and damage, is another expense to budget for. Ask your current tenant’s insurance provider for a ballpark quote on the types of homes you’re interested in.

Condo fees, if applicable.

Moving costs – This might not be too costly if you’re just moving across town and go DIY with a truck rental. A long-distance relocation with professional movers, however, can cost thousands.

Miscellaneous – Even if you’re not buying a fixer-upper, your new home might require immediate handiwork and repairs, or you may want to paint/redecorate, replace appliances or need new furniture when you move in, so be sure to budget accordingly.

What tools are available to first-time home buyers?

There are several government programs available to help would-be homeowners save for a house. For the purposes of these incentives, you’re considered a first-time buyer if you haven’t lived in a qualifying home that you or your partner owned (or jointly owned) during the current or last four calendar years.

Home Buyers’ Plan (HBP)

If you have money saved in a Registered Retirement Savings Plan (RRSP, called an RSP at Tangerine), you can now borrow up to $60,000 from the account tax-free to help pay for your first home. This is an increase from the previous HBP tax-free withdrawal amount of $35,000. (If you’re buying the property with a partner or spouse, each of you can withdraw $60,000 from your own RSPs, for a total of $120,000.)

Read More: How does the RRSP Home Buyers' Plan work?

Note that funds must be held in an RSP for a minimum of 90 days to be eligible for the program, and you must pay back the full amount to your RSPs in instalments over 15 years (with a minimum repayment schedule), or you’ll be charged income taxes on the outstanding balance. For withdrawals made between Jan. 1, 2022 and Dec. 31, 2025, there will be a five-year grace period before you need to start making repayments.

“These changes to the HBP will give Canadians a chance to beef up their down payment, which is good and can mean starting homeownership with a smaller mortgage,” says George Kibalian, senior manager of retail lending at Tangerine. “But homeowners will have to budget for the higher repayment plan.”

He notes that an individual who withdraws the full $60,000 from their RSP will need to repay $4,000 per year for 15 years.

First Home Savings Account (FHSA)

This new registered account allows Canadians aged 18 and older to save up to $40,000 tax-free toward purchasing a first home. The FHSA can be a huge boon to aspiring homeowners since it combines the best aspects of RSPs and Tax-Free Savings Accounts (TFSAs). You can contribute up to $8,000 each year to an FHSA, and the contributions are tax deductible — similar to an RSP. When you’re ready to buy that first home, you can withdraw your savings and all the interest or investment income, tax-free — just like with a TFSA. The account can remain open for 15 years, and unused contribution room in any given year can carry forward to the following year. If you don’t end up buying a home within the 15 years, your FHSA savings may be transferred to an RSP or withdrawn as taxable income.

30-Year Mortgage Amortization

As of Aug. 1, 2024, first-time buyers who are purchasing a newly built home will be able to choose an amortization period of up to 30 years on an insured mortgage. This measure, pending approval of the 2024 federal budget, will make mortgage payments more affordable for these new homeowners — although a longer amortization means you will pay more total interest over time.

“Lower payments can certainly help with affordability. This may assist Canadians in getting access to markets they were marginally priced out of,” says George Kibalian. But, he cautions, “although longer amortizations offer lower payments, they also carry higher interest costs in the long run.”

Note also that this proposal only applies to down payments of less than 20% of the home price, which is currently allowed only on homes of under $1 million.  

First-Time Home Buyer Incentive

Unfortunately, this short-lived program was discontinued as of March 31, 2024. Launched in September 2009, the incentive offered eligible first-time buyers up to 10% of a home’s purchase price through an interest-free shared-equity mortgage with the federal government. The uptake of the program was less than robust, partly because the criteria to qualify were quite limiting.

For example, household income could not exceed $120,000 (or $150,000 in Toronto, Vancouver and Victoria), the down payment had to be less than 20%, and the total amount borrowed (including the mortgage, mortgage default insurance and the FTHBI itself) could not exceed four times household income (or 4.5 times in the hotter real estate markets).

Other incentives for first-time buyers

Aside from the programs above, there are also tax credits and rebates that you might qualify for as a first-time buyer, including the following:

• First-Time Home Buyers’ Tax Credit (HBTC) – This federal non-refundable tax credit, which must be claimed within the year you buy your first home, can save you up to $1,500 in income taxes when you file your annual return.
• Land transfer tax rebates – Depending on where you live, you might be eligible for a full or partial rebate on the land transfer taxes you pay on your first home. Provinces and municipalities that provide rebates include Ontario, British Columbia, Prince Edward Island, and the City of Toronto.

Best ways to save for a house

Now that you know how much you need to save for your first home and the tools and incentives available to first-time buyers, use these saving strategies to help you get there faster.

1. Set savings goals

Accumulating a five- or six-figure nest egg to put toward a home purchase will take time and persistence. To stay on track, it’s best to break down your total savings target into smaller chunks and attach realistic timelines to each amount. You’ll also want to build in some accountability, so consider talking about your goals with a friend or family member you look up to — research shows you’re more likely to follow through with commitments when you share your plans with someone you respect. As you achieve these shorter-term milestones, you’ll also feel a sense of accomplishment, which will go a long way toward keeping you motivated on your savings journey.

2. Budget for savings

Instead of paying for all your monthly expenses and saving whatever’s left over, create a budget that includes savings as its own line item. Start by taking stock of all your income so you know exactly how much money you’ve got coming in. Then, track your spending for a month or two to see where it’s all going. Draw up a monthly budget that accounts for these expenses and the amount you’d like to save. By prioritizing your savings this way, you can make active decisions about how you use your money and where to cut back, if necessary.

Tangerine Clients can easily track expenses on their Chequing Accounts (and what they've got left) with the built-in Left to Spend tool.

3. Reduce expenses

Discretionary expenses — such as dining out, vacations, entertainment, etc. — are obvious places to cut down spending. Similarly, there may be memberships or subscription services you aren’t making the most of and could do without — even if only temporarily. Otherwise, see if you can get a discount from your service providers for being a loyal customer, or try to find better-priced options. To really ramp up your savings, however, you might want to review your fixed costs with an eye to making some lifestyle changes. This could involve downsizing to a smaller apartment, carpooling to work, or finding lower-cost alternatives for your daily necessities.

Read More: How can I save when my rent is so high?

4. Pay down high-interest debt

Another way to reduce your expenses is to pay off high-interest debt, such as any credit card balances you carry. Once those debts are repaid, you can redirect the interest payments to your savings. Plus, you’ll be in a better financial position when it comes time to take out your mortgage. To pay off high-interest debt more quickly, contact your bank to see if you can refinance the debt or consolidate it into a lower-rate loan.

5. Use a no-fee cash-back credit card

Speaking of credit cards, you might as well get cash back in lieu of travel rewards for your spending — especially if you’re taking a hiatus on long-distance trips while you’re in prime savings mode. Choose a no-fee card to maximize your savings.

• Learn More: Compare Tangerine's credit cards with Money-Back Rewards

6. Earn more interest

Make your money work harder by putting it in a high-interest savings account, Guaranteed Investments (GICs), a money market fund or other short-term investment. Just be sure to choose options that align with your risk tolerance and time horizon to avoid having to cash out investments at a loss when you’re ready to buy your home.

7. Automate your savings

Once you have a budget specifying an amount you plan to put aside each month, use technology to simplify the savings process. Set up automated transfers from your chequing account to a savings account so you can take one more thing off your monthly to-do list. Similarly, you could ask your employer to deposit a portion of your pay (or any bonuses you might receive) directly into your savings account. For that matter, if you’re expecting an income tax refund, you can provide your savings account information for direct deposit when you file your return. Any of these methods will make you less tempted to spend your savings, thanks to the cognitive bias of mental accounting. Research shows that once money is earmarked for a specific purpose, we find it difficult to use it for something else.

• Learn more about Automatic Savings Plans and other free tools for Tangerine Clients.

8. Increase your income

If you’ve been through your budget and can’t find any new savings opportunities, approach the situation from the other side by looking for ways to earn more. Pick up extra shifts, put in for paid overtime or ask for a raise, if possible. Take courses or certifications that might help you land a better position with a higher salary. Find a side job or occasional work that can supplement your regular income or sell items you have on hand that you aren’t using.

Bring it home

Buying your first home is a significant accomplishment that’s made easier with careful planning and smart savings strategies. By determining how much you need to save, taking advantage of available tools and incentives, and implementing savvy savings techniques, you’ll be on the doorstep of homeownership in no time.