You've moved to a new country and now you're ready to start building the life you want in Canada. If your dreams include being a homeowner, the first big financial goal you'll likely focus on is saving for a down payment to put towards your purchase.
We're here to help you understand mortgages in Canada, what saving plans are available and walk you through what you need to know about the registered accounts you can use to help you save — so you can work towards your big move in day.
While the basic concept of a mortgage remains the same from country to country, newcomers might be surprised to find that many specifics of mortgages in Canada vary considerably from the country they're from.
For example, if you are from a country like Japan, the Netherlands and Spain, they don't have credit scoring systems. If you're from one of these countries, you'll have a few things to learn about how credit scores, credit reports and your credit history work to effectively navigate the process in Canada.
Similarly, newcomers from the U.S. might be surprised that something commonly found south of the border — like a 30-year fixed mortgage — isn't available in Canada. While loans are amortized over up to 30 years in Canada, loan terms are limited to much shorter periods of time, like five years.
A mortgage is a loan that you borrow from a bank, credit union or private lender that can be used to finance the purchase of a home. It can also use equity in your existing home for other purposes. It is a legal contract between you (a.k.a. the borrower) and the lender. A mortgage outlines the details of your loan, including your payments, the length of your term, interest rate and other terms you need to know.
As the borrower, you agree to repay the principal of the loan, as well as any interest on the principal at an agreed-on interest rate over the course of a predetermined loan term and amortization period.
In Canada, borrowers can amortize their loans over periods of up to 30 years. This means that payments are calculated so loans are paid off within 30 years.
However, mortgage terms in Canada can be as short as six months with an average loan term length of about three to five years. Borrowers then end up renewing their mortgages or refinancing them at the end of each loan term rather than getting a mortgage that covers the full amortization period.
For most newcomers (and really for anyone buying a home in Canada), this is a really important step. A down payment is the amount of money that you need upfront to put towards the home to supplement your mortgage. In Canada, the minimum down payment is between 5% and 20% of the purchase price.
What you need to put down initially depends on the amount of the purchase price. Here is the breakdown of the minimum down payment:
- For homes priced $500,000 or less: 5% minimum down payment
- For homes priced between $500,000 and $999,999: 5% on the first $500,000 and 10% on the remaining amount
- For homes priced over $1,000,000: 20% down payment
Note: If your down payment is less than 20% of the purchase price – you will need to buy mortgage default insurance. Mortgage default insurance applies to homes under $1 million, so you’re required to put 20% down. Another reason why it’s important to start saving for a down payment for your new home
Based on the three categories – here is how you can do the math:
- For homes priced $500,000 or less: You need to take your purchase price and multiple it by 5% to get your down payment.
o Ex. on a $500,000 home: $500,000 x 5% = $25,000
- For homes priced between $500,000 and $999,999: You will need to add two amounts. The first is 5% of $500,000. The second amount if 10% of the remaining price of the home.
o Ex. on a $750,000 home:
° $500,000 x 5% = $25,000
° $250,000 x 10% = $25,000
° $25,000 + $25,000 = $50,000
- For homes priced $1 million and above, you need to multiply by 20%
o Ex. on a $1,000,000 home:
° $1,000,000 x 20% = $200,000
While you're only required to make one of the minimum down payments we outlined above, you might decide to make a larger down payment. Why? Making a larger down payment can help you:
- Qualify to buy a more expensive home
- Reduce the amount you pay each month
- Reduce the interest you pay over the life of your loan
- Save yourself the cost of CMHC insurance (can range from 1.70% to 3.10% of your mortgage payments)
You should know: When you buy a home, you'll also have to budget for things like property taxes, land transfer taxes and closing costs.
So how do you start saving towards your home? Here are some made in Canada saving tips.
1. Build your budget around saving
If you dream of buying a home in Canada, it's important that you build your budget around making that dream come true. First, you might want to use an affordability calculator to help you figure out how large of a mortgage you can handle. Then, when you look at how much you can afford to spend on housing, food or other expenses, decide what you'd like to put aside every month towards saving for homeownership.
Consider choosing a percentage of your paycheque to direct into savings. It might be anything from 5% to 20% each month. Once you've decided on that, you can divide up the rest of your budget towards your wants and needs. That will help you choose a rental apartment or home, whether to buy a car or use public transit and make other financial decisions that are in line with your home ownership goal.
Unsure where to start? Scotia advisors can help you make a home ownership savings plan.
2. Automate your savings
The fastest way to save money for any financial goal is to make it so easy that it’s part of your routine. You can set up pre-authorized contributions after your monthly, biweekly or weekly paycheques.
By immediately putting the money into your saving or investing accounts, you won't be tempted to spend it. You'll also earn interest on the money, which could help you save up the money you need sooner.
3. Use your refunds and bonuses
While it can be hard to find extra money to put towards saving for a down payment — especially when dealing with inflation — you can direct any expected or unexpected windfalls towards your savings. For example, if you get a tax refund, you can put that towards your down payment. Does your work give you a bonus? Put that towards your down payment, too. Any amount you can add to your savings goals can help.
4. Open a Tax-Free First Home Savings Account (FHSA)
The Government of Canada is introducing Tax-Free First Home Savings Accounts (FHSAs) in 2023. These are registered savings accounts in which first-time homebuyers in Canada can deposit up to $8,000 per year, up to a lifetime maximum of $40,000 per taxpayer.
When you make a contribution to an FHSA, you'll be able to take a tax deduction to help offset the tax you paid on that $8,000 in that year. You may carry forward up to $8,000 of your unused annual contribution amount to use in a later year. The money then grows tax-free and can be withdrawn without incurring taxes.*
5. Use your Registered Retirement Savings Plan (RRSP)
While RRSPs are primarily for saving for retirement, the government lets taxpayers use a portion of RRSP savings to put towards a down payment on their first home. This plan, called the Home Buyer's Plan, allows you to withdraw up to $35,000 from your RRSP funds to put towards your first home. If you choose to do so, you'll have to make an annual repayment and repay the funds within 15 years.
If you haven't yet created an RRSP, be sure to check with the CRA to understand how much you can contribute. RRSP contributions are limited to up to 18% of your previous year's income, up to a maximum of $29,210 in 2022.
6. Open a Tax-Free Savings Account (TFSA)
TFSA is a registered tax-advantaged account where you can invest after-tax funds and they grow funds and take out funds at any time tax-free for any reason. It's great for investing for short- and medium-term financial goals, like buying a home.
If you have maxed out your RRSP contribution room, a TFSA is a great alternative account to save for a down payment. Because your investment returns are tax-free in a TFSA, investors might choose a TFSA to take advantage of potentially market returns from mutual funds or higher GIC rates.
Be sure to check your TFSA contribution room as it only starts once you receive your Social Insurance Number (SIN). For example, a newcomer would only have $6,500 of contribution room in 2023 if they became a deemed resident for tax purposes in 2023, have a SIN and were over 18 years old.
While buying your own home might feel like a long-term goal, if you save consistently and strategically, you'll be able to make your home ownership dream come true much sooner. A Scotia advisor can work with you to create a savings plan to help you get closer to walking into your very own home in Canada for the first time.