How much should you save to buy a home
by Dave Williams
Planning to buy a home? Good start to planning your retirement, you might get out of work early this century!
This is one of the biggest, and trickiest questions we get from folks like you in the planning stages of buying a home so bear with me as I explore the answer.
USE YOUR RRSP`s!
The first thing you need to know is the Government of Canada has a Home Buyers Plan (HBP) for the first time home buyers, which allows you to withdraw up to $25,000 from your RRSP’s to buy your first home. So “Save” your first $25,000 by making RRSP contributions up to your max. As always there are some limitations so read up on the plan or discuss it with your mortgage broker.
Minimum Down Payment
You came here for a number so let’s get to it. The minimum you will require is a 5% down payment in order to get a mortgage, so on a $300,000 home in Ottawa you will need to save up $15,000 (in your RRSP’s, right?). However , this is the bear minimum and there are other costs you will need to pay such as Canadian Mortgage and Housing Corporation (CMHC) insurance premiums, land transfer tax, lawyer fees, adjustments, and moving fees.
5% x $300,000 = $15,000 min. down payment and a mortgage of $285,000
Additionally, any time you take out a mortgage with less than 25% down there are CMHC insurance fees (the reason you can get a mortgage with less than 25% down is because the government insures your mortgage to the banks). On this $300,000 mortgage, with 5% down ($15,000) there would be a $7,837.50 fee (which is rolled into the mortgage)…but you would pay the HST of $1,018.80 out of your own pocket.
$15,000 down + Mortgage of $285,000 = CMHC Fees of $7,837.50 and HST of $1,018.80
$16,018.80 in savings needed, and $292,837.50 will be financed.
The good news is the more you put down the lower this fee is, for example if you saved up 10% ($30,000) the fee would be $5,400 and cost you $702 in HST. I have omitted the CHMC fee calculations due to complexity, but your mortgage broker or this CMHC Fee Calculator can give you specifics on different prices.
Land Transfer Taxes
In Ontario, there are also Land Transfer Taxes, in our example, on the same $300,000 home the land transfer taxes would be $2,975. (You can learn more about how these rates are calculated and use an online calculator for your specifics over at Rate Hub) This fee is paid on closing at the lawyers office, and if you are a first time home buyer you can qualify for up to $2,000 off.
$2,975 – $2,000 Rebate = $975 + 16,018.80 = $16,993.80 in Savings
There will be adjustments to the price depending on what has been paid, for example condo fees or municipal taxes paid up till the end of the month will be prorate. For easy math let`s say $1000 in bills have been paid up to the end of the month, and you close on the 15th, the price will be adjusted by $500 for the sellers. We suggest buyers budget up to .5% for this as sellers may have prepaid some bills (like municipal taxes) for the entire year. Following our example of a $300,000 home we would suggest having an additional $1,500 banked.
$16,993.80 + $900 + $1,500 = $19,393.80 in Savings ($15,000 of course in your RRSP`s)
If you skipped right to the bottom, the answer was a minimum 7.5% of your planned homes value. More is always better, and if you are a first time home buyer, use your RRSP`s and a primary savings vehicle. This guide is meant to help you get informed on the home buying process but should not substitute advice from a real mortgage professional who can help you determine a personal savings plan base on how much mortgage you currently qualify for or create a plan for how much you need in order to qualify.