Saving for a Home in Canada

For most Canadians, a home is much more than a financial investment – it's a lifestyle choice. If you're ready to get into the real estate market but don't know if you can afford it, here's what you need to know.

The first step is to determine your net worth, to see if you can afford a house and how much can realistically be spent on it. Count up your total assets, and then subtract your liabilities. If you are thinking of buying with your spouse or a partner, include their finances as well. Canada Mortgage and Housing Corp. (CMHC) has a calculator to help.

All of your monthly housing costs should not be more than 32 per cent of your gross monthly income. Included in monthly housing costs are mortgage payments (principal plus interest), taxes and utilities. For condos, include maintenance fees.

A second rule is that your monthly expenses, including housing costs, car loans, credit card payments and other loan payments, must not be more than 40 per cent of your gross monthly income.

Once you have determined those numbers, you can take them to a financial institution or mortgage broker and calculate how much you can afford. For a general idea, check out the chart here. Get pre-approved for a mortgage at your financial institution. Make sure you shop around because there is healthy competition in the mortgage industry and you can generally find a better deal if you look for it.

Saving up the down payment for a home is the hardest part, especially if you live in a part of the country where house prices have been rising rapidly during the last several years. For a conventional mortgage, you need a down payment of 20 per cent of the purchase price. The larger the down payment, the smaller your mortgage and the less you will have to pay long-term in interest. However, coming up with that amount of money isn't easy, and you can buy a home with as little as five per cent down.

When a home is bought with less than 20 per cent down, it's known as a high-ratio mortgage and you'll have to buy mortgage insurance. This insurance is to protect your lender in case you default on the mortgage. The cost of the mortgage insurance is based on how much is borrowed, ranging from 0.5 per cent up to as much as 2.90 per cent. It can be paid as a lump sum or as part of the regular mortgage payment.

The government offers a couple of incentives for first-time home buyers. If you have an RRSP, you can borrow up to $25,000 tax-free from it to put toward buying a home. The money must be paid back within 15 years, and you must pay at least one-fifteenth of the amount borrowed every year.

You can also take advantage of the First-Time Home Buyer's Tax Credit, which helps with the closing costs of the purchase. The program gave a $750 tax credit to eligible buyers in the last tax year. Some provinces also offer tax credits or incentives for first-time buyers.

Now you'll have a decision to make. Based on how much you can afford, should you buy now or try to save more money to build up a larger down payment? If you wait, you may save enough to get a smaller mortgage and perhaps avoid mortgage insurance payments. But you will have to continue renting when that rent money could have gone toward paying down the mortgage. If you do buy now, you'll pay more interest and you'll have to watch your spending carefully, but you will be in your own home.

Studies have shown that it's easier for homeowners to accumulate wealth than renters because of the built-in savings you get when paying off a mortgage and building equity in your home. Non-homeowners must work harder and be more disciplined in saving and handing their money.

If you're saving for a home, set goals for yourself – it's easier to save when you have a plan and can see yourself getting closer to your goals.

When you are ready to go shopping for a home, make sure you have a clean credit record by staying up-to-date with current bills. If you have no credit history (perhaps you are just starting out or are new to the country), apply for a credit card that has good interest rates and make some small purchases, making sure you pay off your balance as soon as the bill comes in – that way you'll pay minimum interest and will start building up a good credit record.

Most importantly, don't let the emotion of buying a house put you in a bad financial situation. Take your time, plan your purchase and do your homework.

The Financial Consumer Agency of Canada (FCAC) has several workshops and calculators that may be helpful.



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