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Published August 5, 2022

How to Save for a Down Payment

First, decide how big of a down payment you’ll need and set a goal. Then, consider incentives and determine the best place to grow your money.

Buying a home in Canada can be tricky since prices have risen quite a bit. That said, with a lot of discipline and a good down payment, becoming a homeowner is possible. Knowing how to save for a down payment can make homeownership a reality since it’s not as simple as putting money aside each month.

What is a minimum down payment?

A down payment is required if you want to purchase a home. The amount you put down is applied directly to the purchase of your home. Once you’ve purchased a home and you’re ready to close on it, your lender will deduct your down payment from the purchase price and provide you with the rest of the funds in the form of a mortgage.

The amount you need for a down payment depends on the home, but it ranges from 5% – 20% of the purchase price.

Purchase priceMinimum down payment required
Less than $500,0005% of the purchase price
$500,000 to $999,9995% of the purchase price for the first $500,000; 10% for the portion above $500,000
$1 million or more20% of the purchase price

Let’s say you’re looking to buy a home that has a purchase price of $500,000. You would need a 5% down payment of $25,000. On the other hand, if you’re looking at a property that costs $600,000, you would need to have saved at least $35,000.

Many people try to come up with a down payment of at least 20% to avoid the need for mortgage loan insurance. Others will buy as soon as they have the minimum down payment required just to get into the market. What you settle on is a personal choice, but it also depends on housing prices in your area and the amount of money you qualify to borrow from a mortgage lender.

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Ways to save a down payment

Admittedly, saving for a down payment can take a long time since it comes down to simple math. For example, let’s say you need a down payment of $30,000, and you can only save $1,000 a month. It’s going to take you two-and-a-half years to reach your savings goal. Fortunately, there are a few strategies that could help you boost your savings.

Cut your expenses

Assuming homeownership is your top priority, you should try to cut any unnecessary expenses. Take a look at your budget and see if there are any expenses you can reduce, such as entertainment, dining out, travel, etc. Every dollar you save can be diverted to your home down payment. You might even want to consider more drastic measures such as selling your car or moving back home with your parents, as it could significantly lower your monthly expenses.

Another thing to consider is any outstanding high-interest consumer debt you may have. It makes no sense to save for a down payment when you’re paying 20%+ interest on your credit cards. You’ll end up spending more to service your debt than what you can save.

Put your money in a high-interest savings account

Since you’ll be setting your money aside in a bank account, you might as well make some interest. Unfortunately, most traditional financial institutions now pay nearly zero interest, so you’re better off moving your money to a digital bank where they offer a more competitive interest rate. Admittedly, you won’t get rich from these bank accounts, but it’s better than nothing.

One easy trick to help you save is to set up automatic transfers between your accounts. For example, if you can afford to save $1,000 every month, set up a recurring transfer where your digital bank withdraws $1,000 from your regular bank on the 1st of every month. Then, as you adjust to saving, you can slowly increase the amount you’re transferring or make manual transfers when you have additional funds.

Use the Home Buyers’ Plan

The Home Buyers’ Plan (HBP) is a program that allows you to borrow up to $35,000 from your Registered Retirement Savings Plan (RRSP) tax-free. If you’re buying a home as a couple, you can each withdraw from your RRSP, giving you access to up to $70,000 for your down payment. You need to repay the funds to your RRSPs within 15 years.

To qualify for the HBP, you must be a resident of Canada and considered a first-time homebuyer. Additionally, you’ll need a written agreement to buy or build a home. Investment properties don’t qualify for the HBP, so you must occupy the home as your primary residence.

Withdraw from your Tax-Free Savings Account

A Tax-Free Savings Account (TFSA) lets you grow your savings without paying income tax and withdraw whenever you wish — making it a great place to set aside your savings.

If you already have funds built up in your TFSA, you can transfer them to your RRSP, assuming you have the contribution room, to get a tax deduction and boost your Home Buyers’ Plan funds. (Note, however, that your contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be tax deductible.) Or, you can simply withdraw your savings directly from the TFSA for your down payment.

» MORE: How a TFSA compares to an RRSP

Use the First-Time Home Buyer Incentive

Another government program that can help you increase your down payment is the First-Time Home Buyer Incentive (FTHBI). If you have at least 5% of the purchase price saved as a down payment, the government will give you an additional 5%-10%. These additional funds will increase your down payment, which would then lower your monthly mortgage payments.

There are some strict conditions to qualify for the FTHBI. You must be a Canadian citizen or permanent resident and a first-time homebuyer. Your income can’t exceed $120,000 unless you’re buying in Toronto, Vancouver or Victoria, where the cap is $150,000. The program is a shared-equity mortgage, so the government has a share in any increases or decreases of the property value.

Be mindful of what you do with your money

For many people, the idea of saving a down payment for multiple years is challenging. They may start to wonder if it’s a good idea to invest their down payment so they can reach their goal more quickly. While it’s certainly possible to see some gains if you were to invest, you also have an equal chance of losing money.

Since you’ll likely need your funds soon, your best bet is to keep your down payment in a high-interest savings account or to invest in a product that has minimal risks, such as a guaranteed investment certificate (GIC). By using this strategy, your money will always be safe.

About the Author

Barry Choi

Barry Choi is a personal finance and travel expert. His website is one of Canada's most trusted sites when it comes to all things related to money and travel.

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