How to Save for a House

These days a dream house seems like just that: a dream. With skyrocketing real estate prices, stagnating wages, and an all-time low rate of house-ownership among millennials, owning your own home might seem like a daunting goal, but with the right strategy, it’s achievable.

Cut down on unnecessary expenses

Saving for any sort of down payment on a home will require sacrifice. It's a lot of money. Fortunately, the easiest way to cut back is the best way to save. And that's eliminating small purchases that have become habitual but likely provide relatively little value to your life. Cut down on things like eating out, premium coffees, shopping for things you don’t immediately need. First-time savers are invariably surprised at how much you can save each month—because they never really know how much they were spending on the little things each month. And that savings will almost certainly mean thousands of dollars over the course of a year.

Save on rent

Rent tends to be one of the biggest monthly expenses, so if you can find a way to save there, your path to homeownership will become shorter. Can you move into a smaller place that’s cheaper? Get a roommate? Sacrificing space and privacy will be tough at first, but your new digs are temporary housing, a waystation, a halfway house where you don't have to live with criminals! (We hope.)

Use cash for most of your daily transactions

People tend to be more aware of how much they’re spending if they buy with cash instead of a card. If you commit to using cash for your day-to-day expenses, you’ll be more mindful and ultimately more conservative about how you decide to spend that money.

Put money into a savings or investment account

Make the most of all your newly saved money by putting it in a savings account or by investing in a balanced investment portfolio. If you don't know anything about investing, a robo-advisor can help, doing most of the investing for you. If you commit to investing or saving a certain amount of your paycheck each month, your savings will steadily grow, without any action on your part.

When saving for a house should take advantage of all the tax breaks you can — for example by maxing out your TFSA. The Canadian government came up with TFSAs to encourage people like you to save for major life events such as home buying. Not contributing to tax-advantaged accounts is almost like turning down “free money”.

Add large lump-sum payments to your savings

Whether those be your tax returns, a bonus, or a cash gift: Instead of spending it, save it to quickly move closer to your goal.

Have an emergency fund

You don’t want to be dip into the money reserved for your down payment the minute any sort of financial emergency arises. So before you even start saving, make sure you have about three to six months’ worth of expenses saved up in a separate “rainy day fund" so that your homeownership plans don’t get derailed by any costly surprises.

Keep your credit score in good shape

The better your credit score, the better the interest rates on any loans you apply for will be, which will save you money in the long run.

How to save for a house while renting

While you’re busy diligently saving, the reality is that you still need to live somewhere. This probably means you’re still renting while inching your way toward homeownership. And while monthly rent payment may feel like an obstacle toward that down payment, you can still accumulate some significant savings.

Live in an area your cool friends wouldn’t be caught dead in:

Google “hottest neighbourhoods” for your city, and then... don't move to any of those places. You'll not only save on rent, but you're less likely to spend money at the bars, restaurants, and shops that make these neighbourhoods so trendy.

Cut out subscriptions:

Do you really need The New Yorker delivered in person to your house, or could you just pay for the online subscription? Let’s be real, you’re probably not reading it cover to cover anyway. Can you bum your friend’s ex-boyfriend’s sister’s ex-girlfriend’s Netflix password instead of paying for your own?

Get a roommate or Airbnb a spare room:

Just clear it with your landlord first.

Create an untouchable down payment fund:

If you’re putting your down payment fund in the same place where you pay your rent and your bills, you’re going to see way more money coming out than staying in, no matter how hard you try to discipline yourself. Commit to a savings account or an investment account where you’ll contribute a set monthly amount plus anything else you can afford, and then literally just… forget about it. Deny it even exists.

How to save for a house in a year

If you can’t stand to rent one more minute, but don't have a down payment saved up, then you’re going to have to tighten the belt a bit more.

Get rid of your car, if you can:

Can you carpool or cycle or use public transport instead? Selling your car and saving on insurance and maintenance will make give a huge boost to your savings.

Get a side-hustle:

Whether that’s taking on some freelance work, driving Uber or Lyft, or setting up an Etsy shop to sell your crochet vests for small dogs—an income increase means a savings increase.

Don’t go on holiday:

Your “friend”’s Instagram post from Crete is a siren call, but keep your eye on the prize! You'll never live in Crete! And think of how many self-satisfied social media posts you can put up from inside your new house.

Move in with your parents:

Not ideal. We get it. But if you have a very clear timeline on when to move out this is almost certainly the fastest way to home ownership. Rent is likely your biggest single expenditure. Eliminate it and you'll be on the fast track to home ownership.

Choose high-yield, low-risk investments:

For short-term goals, it’s best to put your money in high-yield, low-risk investments, since you’ll be more protected against the market’s fluctuations. The best bet for this might just be bonds. Bonds tend to be less risky than stocks and can really help optimize short-term returns.

How much to save for a house

A seemingly obvious yet no-less-crucial part of saving up for a house is not just knowing how to save, but knowing how much to save. This is where it becomes important to be realistic about your budget, your goals, and inform yourself about mortgages, maintenance costs, and down payment options.

Sometimes it can be helpful to determine how much you need for your house and your timeline for buying it. Then reverse engineer the smaller amounts that you will need to set aside each month to reach that target.

Know what percentage you have to pay as a down payment

The minimum down payment you need will depend on the price of the home you want to purchase. If the price of a home is $500,000 or less, you’ll need a five percent down payment. If the price of the property is over $500,000 but less than a million, then you’ll need five percent on the first $500,000 and then ten percent on the remaining amount. So if you want to buy a house worth $600,000, your down payment will be $35,000 (the first five-percent down payment is $25,000 and the remaining ten-percent payment is $10,000). Depending on where you want to buy, the type of property and size, the purchase price will range wildly. For example, the average condo for sale in Toronto costs about $600,000, while the average Toronto house price is upwards of $1,000,000.

Don’t forget maintenance costs and fees

When you’re buying a house, you’re not just saving up for a down payment. If you’re working with a real estate agent, you’ll also have to pay their fees. You’ll also be looking at insurance fees if you’re buying title insurance and homeowner’s insurance. Before you sign anything, you’ll also want to have the house inspected in order to avoid any unpleasant surprises down the road. That, too, will cost you.

Explore options for first-time buyers

In Canada, there are a number of options for first-time buyers, including a First-Time Home Buyer’s Tax Credit of $5,000, or a Home Buyers' Plan (HBP) that allows you to withdraw up to $25,000 in a calendar year from your registered retirement savings plans (RRSPs). It’s worth taking the time to explore your options.

Keep your debt to income ratio in mind

It’s also important to know how much debt you can afford when shopping around for mortgages. Usually, your debt to income ratio (DTI) should be your pre-tax income times three. This means that the maximum total cost of your house should be three times your gross annual income, at most. Also, no more than 30 percent of your monthly earnings before taxes should go toward your debt payments (monthly mortgage payment, credit card payments, student loans, etc). If you go any higher than that, you may struggle to meet your monthly debt payments and have a harder time qualifying for competitive mortgages.

Best accounts to save for a house

You don’t want to keep the money you’re saving for a down payment in your checking account. Depending on your timeline and how quickly you’ll want access to funds, you’ll either want to put your money in a savings account with high returns or in a low-risk investment portfolio.

Savings account for the short term

Choose a savings account for your down payment fund if you want to have access to that money pretty soon (say, in like one to five years). You're probably better-served saving rather than investing as where your money is less likely to fluctuate over the short term. The benefits of a savings account are mostly found in its convenience: you can set up recurring monthly deposits and withdraw it easily once you need it. The drawback is that most savings accounts have pretty low return rates. In order to maximize your savings lookout for savings products that are marked “high-yield” or invest the money in a savings investment product where you generally get higher returns.

Investments account for the long term

If you’re okay with biding your time and saving for as long as possible before buying a house, you might be better off investing rather than saving. The stock market and many other investments rise and fall over time but studies show that historically they have grown (significantly) over time. Investing is an option for those looking to put money away for a house that they won't buy any time soon. You'll be able to ride the wave of the stock market and other investments that are prone to fluctuate. Investing is riskier than saving, of course. With investing, there are no guarantees, but generally, the returns are higher. Regardless of whether you decide to save or invest, start as soon as you can, then sit and watch the magic of compound interest do its thing.

Saving for a down payment

The biggest financial hurdle to overcome is saving up for the down payment, of course. A bigger down payment ensures that your mortgage payments don’t leave you scrambling for cash each month and that you get decent rates on your loan. So the more you can save, the better.

Aim to save 20% of the purchasing price

By having at least 20 percent of the house’s asking price saved up, you’ll likely avoid having to buy mortgage insurance and secure more favorable rates from lenders. It can also increase the strength of your bid among sellers. Another benefit of paying at least 20 percent? You’ll be more protected against property price declines and ensure that your outstanding mortgage balance doesn’t exceed your property’s value.

Invest in a low-risk, diversified portfolio

If you’re aiming to save for a 20 percent down payment, it’s going to take a little longer than saving for a five percent one. That means you’ll want the money you’re saving to work hard. You could put it in a savings account, but to ensure that your money grows above the rate of inflation, we recommend investing by spreading your money across stocks, bonds and real estate, so that if one area of the market drops, your entire investment portfolio won't take a hit. And watch out for high fees. Some investment providers are notorious for charging high fees that end up eating up all your gains with high annual fees.