Canada is known for its high quality of life, strong job market, and rising real estate values. And owning a home in Canada is a significant milestone and smart investment. However, homeownership starts with saving for a down payment on a home. A crucial part of the home-buying process, a down payment demonstrates your commitment to the lender and helps reduce the size of your mortgage.
This article will help you understand the Canadian housing market, detail crafting a personalized savings plan for your down payment, and highlight how to leverage government home-buying programs and incentives (Canada Mortgage and Housing Corporation (CMHC), 2022). It will also provide investment strategies to turbocharge your savings and discuss the importance of emotional well-being and financial discipline. This article is a great starting point for any Canadian starting their journey to owning their dream home.
Understanding the Canadian housing market
In April 2023, the average home price in Canada reached $716,083 (WOWA Leads Inc., 2023). However, it is essential to understand that there are regional variations, with some areas experiencing higher price increases than others.
For example, Toronto and Vancouver have seen home prices rise by 450-490% over the past two decades (Stokes, 2021). A home in British Columbia cost an average of $913,471 in April 2023. But smaller markets have also seen sharp increases due to factors such as remote work and families moving out of cities.
Understanding Canadian real estate market trends is crucial for potential homebuyers as it can help assess risk and support intelligent decision-making. Urbanization, regional economic conditions, and speculation can drive housing price trends. In 2014, Calgary’s residential house prices fell from their peak due to a downturn in the local energy sector. At the same time, prices in Toronto, Montreal, and Vancouver increased.
Mortgage rules impact
Canada’s mortgage rules also play a significant role in the housing market. Even homebuyers with a down payment of 20% or more are subject to a stress test using the Office of the Superintendent of Financial Institutions (OSFI) minimum qualifying rate or the customer’s interest rate plus 2%–whichever is higher (Toronto-Dominion Bank, 2023).
Also of note is the Prohibition on the Purchase of Residential Property by Non-Canadians Act that went into effect on January 1, 2023. Lenders can only lend mortgage monies to Canadian Citizens, Permanent Residents, or Indians as defined under the Indian Act, with few exceptions (Toronto-Dominion Bank, 2023).
Current market conditions
Canada-wide sales are 19.5% year-over-year. The April sales are up 6% from last month, demonstrating how quickly the market can move. The following table shows the monthly price change for nine provinces (WOWA Leads Inc., 2023).
| Province | Monthly price change (%) |
| Nova Scotia | +9.07% |
| Newfoundland and Labrador | +8.70% |
| Manitoba | +4.61% |
| British Columbia | +3.54% |
| Ontario | +3.30% |
| Quebec | +2.56% |
| Saskatchewan | -3.07% |
| Prince Edward Island | -5.43% |
| Alberta | -6.49% |
It is vital to closely track the Canadian housing market and understand that it can change almost overnight. Current inflation concerns and prime rate hikes significantly affect homebuying potential, given the higher cost of borrowing. It is not to say that you cannot buy a home in the current market. You must remain diligent in watching the market and move quickly when the right opportunity presents itself.
Setting realistic home-buying goals
Your home-buying goals should wholly align with your financial situation and personal preferences. The following are key factors to consider when looking for a new home.
Define your dream home
Think about the type of home you want, such as a single-family detached home, a semi-detached house, a townhome, or a condo. Determine your preferred size, layout, and features. Ensure you have the correct number of bedrooms, bathrooms, and adequate indoor and outdoor space.
Location and family planning
Your home’s location is critical. It affects your property’s value, accessibility, and desirability (Struyk, Rasure, & Clarine, 2023). Depending on your circumstances, you should consider the proximity of amenities, schools, work, and your family’s preferences (if applicable) when choosing a location. If you plan to start a family, finding a home to “grow into” might be most suitable.
Determine your budget
Your budgeting should consider current and future income, expenses, and financial goals. Various “rules of thumb” are kicking around the internet. But our rule is that your mortgage should not exceed 30-35% of your gross income. You must also remember that you will be responsible for annual property taxes, home insurance, maintenance, and upkeep.
Estimate your down payment
A down payment is typically expressed as a percentage of the purchase price. 20% is the most common benchmark, with 5% being the minimum down payment needed to qualify for a mortgage. Various online down payment calculators can help you estimate the amount you’ll need to save based on your target home price.
Your credit score is important
Your credit score does not have to be perfect. But a good credit score will help you secure more favourable mortgage terms and a lower monthly payment. Negotiated terms can save you thousands or tens of thousands of dollars over the mortgage lifespan. Maintain a good credit score by paying your bills on time, keeping your credit card balances low, and avoiding excessive debt.
Ninety days
90 days. You must be able to provide sourcing on your funds for ninety days for any payments made towards your mortgage (e.g., deposit, down payment) before and at closing. The best way to do this is by saving the total down payment, waiting ninety days after the last deposit, and then applying for a mortgage. This will save you much grief in explaining every deposit in your account and the accounts that provided the funds.
This is a critical factor in being approved for a mortgage. The simpler your file is, the more likely it will be approved.
Designing a personalized savings plan
Crafting a personalized savings plan will help you stay committed to your down payment goal.
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Creating a custom savings plan is essential to reach your down payment goal. A firm plan will help you manage your finances, track progress, and stay motivated. Some key considerations when building your savings plan include the following:
- Create a budget: Analyze your current income and expenses to see how much you can save each month. Set aside a specific portion of your income for down payment savings and adjust your spending habits as needed.
- Track and reduce spending: Identify where you can cut back on your spending. Put these savings towards your down payment fund.
- Use budgeting apps: Canadian budgeting apps can help you manage your money and track your progress. Popular options include YNAB (You Need A Budget) and PocketSmith.
- Increase your income: Earn extra income from side gigs and freelancing. Some ideas include Lyft or Uber, delivering food, or offering services within your expertise.
- Save bonuses and tax refunds: Saving a portion of bonuses and refunds can help supercharge your down payment savings. Resist the urge to spend these funds.
Leaning on government programs and incentives
Government programs and incentives can help first-time Canadian homebuyers significantly. The following are some great programs to consider.
First-Time Home Buyer Incentive (FTHBI)
This incentive offers a shared-equity mortgage with the Government of Canada. It provides 5-10% for the first-time buyer’s purchase of a newly-constructed home, 5% for a first-time buyer’s purchase of a resale home, and 5% for a first-time buyer's purchase of a new or resale mobile/manufactured home (Canada Mortgage and Housing Corporation (CMHC), 2022). The incentive reduces monthly mortgage payments without adding another financial burden.
RRSP Home Buyers’ Plan (HBP)
First-time homebuyers can withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home (Canada Revenue Agency, 2023). The withdrawn amount must be repaid within 15 years.
First Home Savings Account (FHSA)
FHSA is a new federal government program allowing prospective first-time homebuyers to save up to $40,000 in a registered tax-free account (Canada Revenue Agency, 2023). This savings account will be a game-changer for Canada’s younger generations.
Provincial programs and grants
With some research, you can find various provincial programs for first-time homebuyers, usually in tax credits, incentives, rebates, and grants. Check your province’s specific programs to determine eligibility and benefits.
Energy-efficient home grants
The Canada Greener Homes Grants provide up to $5,000 for eligible home energy-efficient and environmentally friendly retrofits (Natural Resources Canada, 2023).
Exploring additional financing options
You may have more alternative funding sources than you think. The following are some ideas to reach your down payment savings goal more quickly.
- Money from family: Receiving a monetary gift from a family member can help grow your savings. However, it is essential to provide a signed gift letter confirming that the funds are a gift, not a loan. Lenders may even require proof of the family member’s ability to provide the gift.
- Use a Tax-Free Savings Account (TFSA): A TFSA is a flexible savings account where you can save and invest money tax-free. You can withdraw money from your TFSA at any time without paying taxes. This makes it an excellent option for savings towards a down payment.
- Employer assistance: Some employers offer allowances or other assistance programs to help employees cover housing costs. Check with your employer for details.
- Co-buying: Purchasing a property with a friend or family member is more common than ever, given housing costs. This approach can help you share the down payment and mortgage costs, making homeownership more affordable. However, ensure an explicit agreement outlining each party’s responsibilities.
Innovative investment strategies for quick savings
Every dollar counts when you are saving for a down payment. Investing your money wisely can help expedite the process. Here are some savvy investment strategies to consider.
Open a high-interest savings account
A high-interest savings account offers better rates than traditional savings accounts. Look for accounts with no fees and low (or no) minimum deposit or balance requirements.
Invest in stocks, bonds, and mutual funds
Diversifying your investment portfolio with stocks, bonds, and mutual funds can help you achieve higher returns over time (CFI Education Inc., 2023). Investing carries some risk, so assessing your risk tolerance and investment goals is crucial.
Seek professional financial advice
Financial advisors can help you create a personalized investment plan tailored to your goals and risk tolerance (Segal, Rodriguez, & Logan, 2022). Look for certified professionals with designations such as Certified Financial Planner (CFP) or Certified Financial Analyst (CFA).
Mistakes to avoid when saving for a down payment
When it comes to real estate and mortgages, many have gone before you. It is critical to avoid common mistakes that could hinder your progress or lead to financial difficulties. Here are some key mistakes to avoid.
| Mistakes to avoid | Description |
| Not having an emergency fund | Ensure you have a financial safety net before focusing on saving for a down payment |
| Rushing into homeownership without adequate savings | Take the time to save a substantial down payment and consider creating a fund for additional costs |
| Neglecting your credit score and its impacts | Maintain a strong credit score to secure the most favourable mortgage terms and rate |
| Being overly optimistic about market conditions | Stay informed of market trends and be realistic about property values and potential growth |
Emotional well-being and financial discipline
By focusing on your psychological health and practicing patience and perseverance, you can remain balanced as you save towards your down payment goal. Here are some key aspects to consider that will improve your emotional well-being and discipline.
The psychological importance of a savings goal
Saving provides a sense of security and empowerment, manages financial stress, and allows for pursuing long-term goals. Incorporate saving habits into your life; you will have a more fulfilling and happier future.
Practice patience and perseverance
Both traits are essential for success in life. They will help you sustain inner strength and keep going instead of feeling broken and defeated.
Create a support system and share goals
Build a social support system with friends, family, and peers to provide emotional and practical support throughout your financial journey. Being networked will help you stay accountable and receive encouragement when needed.
Engage in self-care
Maintaining your physical, mental, and emotional reserves will help prevent or manage stress. This includes regular sleep, exercise, relaxation, eating well, and meditation. Self-care will also keep you motivated and on the path to your down payment savings goal.
Conclusion
Saving for a down payment on a home in Canada requires financial discipline, emotional well-being, and strategic planning. You must navigate the Canadian housing market, track trends, set realistic goals, and develop a customized savings plan.
Remember, the federal and provincial governments have various programs and incentives to ease the financial burden on new homeowners. And with some creativity, intelligent investment strategies, and a decent credit score, you can avoid some common mistakes and achieve your dream of homeownership in Canada.
