A 4-step guide to saving for your first home

The idea of saving and buying your own home can feel a little daunting. But with budgeting and smart planning, you can make this dream a reality.

Is it better to save for a house in an FHSA, a TFSA or an RRSP?

Here’s the difference between each of these three options:

• Tax-Free First Home Savings Account (FHSA): This registered investment account allows Canadian residents to save up to $40,000 to buy their first home. You can hold different investments in a FHSA, including mutual funds and segregated fund contracts. FHSA contributions are tax-deductible, and any investment growth and withdrawals will be tax-free. With an FHSA, there is no limit on what you can withdraw for a qualifying home. And you don’t have to repay it as long as it is a qualifying withdrawal.
  
  
• Tax-Free Savings Account (TFSA): A TFSA is another great choice for saving for a down payment. They are flexible and easy to use, and any growth is tax-free. Withdrawals are also tax-free. (But the money you invest in a TFSA comes from money you've already paid tax on. There is no deduction for TFSA contributions.) You may contribute up to your TFSA contribution limit. Check with the Canada Revenue Agency to confirm you contribution limit.
  
  
• Registered Retirement Savings Plan (RRSP): If you qualify for the Home Buyer’s Plan (HBP), you can use up to $60,000 of your RRSP savings to help finance your down payment. Under current rules, starting the second year after you’ve made your first withdrawal under the HBP, you have up to 15 years to pay back the money you withdrew. Any amount you don't repay is treated as a taxable withdrawal. *

Ultimately, the decision is yours. It will depend on your situation, and where you are in your savings journey.

* Due to a temporary measure in the 2024 federal budget, there is an additional grace period for people who made or will make an HBP withdrawal between January 1, 2022 and December 31, 2025. They will have three more years before they have to start to make repayments.

How to save for a down payment in 4 steps

Here’s a guide to help you save for your first home.

1. Know how much you can afford

You may want a 3-bedroom, detached home downtown, but can you afford it?  The first step is to understand how much you can afford in monthly mortgage payments.

The size of the mortgage you can take on, plus what you can save for a down payment, equals the price of the house you can afford. If you want more house, you’ll have to save more for the down payment.

But before you start budgeting and planning based on that number, consider the additional costs buying a home entails. Remember realtor and lawyer fees can add up – as well as property taxes, a home inspection, moving costs, condominium fees, heating, electricity, home insurance.

Many people also forget that buying a new place generally means furnishing one, which can be a significant cost. So make sure you have a clear idea of what these fees are going to be and round up. It’s better to overestimate the costs.

Once you have that information, you’re ready to create a budget.

2. Make a budget and set a timeline

This will likely be the biggest purchase of your life. A certified financial planner can work with you to make a plan and help you stay on track.

Also, this is also where your RRSP, FHSA and TFSA come in. First, figure out how much money you will need to save monthly to attain your goal on time.  Then you can even create an automated transfer, either monthly or bi-weekly, depending on your pay period.

3. Review your savings regularly

Now that you’ve got a plan in place, revisit it every so often. You’d be surprised at how much change can happen in a short period.

Perhaps you’ve gotten a promotion which comes with a higher salary. You may want to increase your monthly savings towards your house deposit.

In addition to your own personal circumstances, there are broader factors at play in the economy. For example, house prices often fluctuate. Revisiting your savings plan can help ensure you’re still on track to buy the home you want.

4. Plan for emergencies

You’ve saved up enough for your down payment and now you’re ready to buy. But throwing every penny of your savings into a house might not be the best idea. It’s important to have a safety net.

It can be helpful to have an emergency fund that’s easily accessed. You could consider keeping some savings in a TFSA. That way they can easily be withdrawn, tax-free, in case of an emergency. After all, a broken furnace or a leaky roof in your new home won’t be a cheap fix.

Buying your first home: what’s next?

You’ve estimated costs, budgeted and even managed to save a little extra in your “just-in-case” account. Now you’re ready to find that perfect place. You can work with a mortgage broker and a certified financial planner to make sure you haven’t missed anything.