How to Save a Down payment For a House

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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 to Save a Down Payment for a Home

When it comes to saving a down payment for your first home, deliberate consistent efforts pay off big time.

1. Set a goal to put down at least 10% of the purchase price of your home

You will need to save anywhere from $30,000 to $100,000 for a down payment, depending on the price of your home. 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.

Where you live will determine exactly how much your down payment needs to be. Check out our post on The Income & Down Payment You Need to Buy a Home in Canada’s 25 Largest Cities to see the average cost in your city.

2. Open a high-interest savings account for cash savings

Cash is king, particularly when it comes to buying 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.

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 1.50% interest on your cash savings with EQ Bank, which is a helluva good interest rate for your house downpayment fund!

3. 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:

  1. 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.
  2. 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 yourself!

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 $70,000.

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 2 years after you make the withdrawal. Make sure you factor your HBP payments into your monthly budget as a homeowner!

4. Set up regular contributions to your down payment fund

Your down payment fund won’t grow if you don’t contribute to it! Make sure to set up regular contributions to your savings and investment accounts to keep you on track to meet your goal.

One of the easiest ways to ensure you never miss a contribution to your savings accounts is to set the transfer to happen automatically on or the day after payday.

5. Deposit your income tax refund to your down payment savings account

If you’re working hard to save up $35,000 in your RRSP to use towards your down payment, then your RRSP contributions will likely get you an income tax refund!

You want to use this income tax refund to further increase your down payment savings, so make sure to deposit it directly back into your RRSP. If your RRSP is maxed out, put it in your cash savings account.

6. Find a side hustle to supercharge your down payment savings

One of the easiest ways to reach a financial goal in the shortest amount of time possible is to direct an income stream towards it. If you have the time and energy, now is a great time to take on a side hustle or part-time job to fuel your down payment savings.

You might balk at the prospect of working an extra 10 or 15 hours per week on top of your full-time job in order to bring in extra cash, but if it’s a short-term sacrifice that will help you achieve your dream of becoming a home owner, it’s worth it!

7. Cut your budget

Finally, the tried and true method to squeeze blood out of a stone: trim your budget. If you’ve already completed everything else on this list, the next step is to trim existing expenses for extra cash.

Cutting back on dining out, groceries, cable, and more is an easy (but usually uncomfortable) way to find an extra $100+ in your monthly budget.

Saving a house down payment is a big undertaking, and will probably require you do more than task to achieve it. But if you really want to be a homeowner, you’ll buckle down and commit!

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.

Where you live will determine exactly how much your down payment needs to be. Check out our post on The Income & Down Payment You Need to Buy a Home in Canada’s 25 Largest Cities to see the average cost in your city.

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. Like all financial decisions, you’re the only one that has to live with the consequences of your choices. So do what feels best for you!

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 if you live in a more expensive city.

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.

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 😉

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8 Comments. Leave new

  • Interesting.
    Last I checked, here in India, the idea of down payment had gone out of the window. I had to shell out real cash through banks of course to pay for a small apartment, and that too without the DP. But this is something I can use for my other properties. Thanks.

    Reply
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    Pratibh Pahar
    May 16, 2018 8:00 pm

    really good tips for someone like me, who want to buy home next year. with all this tips i can start working toward my down-payment.

    Reply
  • This post came at a very opportune time! I foresee my bf and I perhaps looking to buy a home in the next 2-3 years (we would both be first time homeowners). I already have around $10k of my portion of the down payment saved, but I’m still unsure on the best place to store it (it’s currently sitting in a high interest savings account). I have a retirement plan through work so I don’t currently contribute to my own personal RRSP right now as 15% of my income (including employer match) is being allocated into a RPP. Therefore, I don’t love the idea of putting this money in a RRSP and shelling out 25k to myself that I MUST pay back to myself in an RRSP as I ideally want to use that money for other goals after my house purchase (for ex, home upgrades or kids). Alternatively, I’m worried about investing this money as 2 years is a fairly short time frame to do anything risky with that money. Anyone have any suggestions? Or am I misunderstanding the Home Buyers Plan/RRSP?

    Reply
  • What suggestion do you have for Americans to substitute step 1?

    Reply
    • You have tax-deductible interest on 30-year fixed rate mortgages! You guys already enjoy a ton of savings, so you don’t need the tax loophole from retirement accounts like we have in Canada (which is maybe why something similar is not available in the US).

      So using a regular bank account or brokerage account is totally fine!

      Reply
  • I live in the GTA and rent of a semi-decent market rate. We did the math, and it seems the best way to think of a home purchase as a good investment is if you’re playing a long game–over time, you’re building equity, and you recoup the transaction costs that you had to put up at the outset. If you’re using a house as a short-term stepping stone to get a leg up, I think that’s when you end up getting into trouble.

    The other frustrating thing of a high-cost of living area is you get so little quality for value. In my neighbourhood, there are tiny 2-bedroom condos listed for almost $500,000 with condo fees at 430/month. Yikes. Average (dare I say, shabby) detached houses go for over 1 million easy. This is a whole new world. It makes me so reticent.

    I’m happy renting, but I do eventually want to own a house. We may just have to play a long game.

    Reply
  • Really good tips for someone like me, who want to buy home next year.

    Thanks for sharing all these

    Reply

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