A home is one of the largest and most exciting purchases you’ll likely ever make in your life. Learn the best ways to budget for a house, hidden home ownership expenses to watch out for and tips to help you reach your goal.
How to budget for a house
1. Establish your starting point
How much do you expect to pay for your new house? Research the cost of homes in the area you want to live in and determine how much you can realistically afford.
2. Break down expenses
Gather every piece of information you can on your current financial picture. Look at your savings, mandatory monthly expenses, discretionary spending, debts, investment accounts and more. Having a clear picture of these items allows you to create a realistic plan for how you can buy your house.
3. Create your plan
Add up all your income. Then, add up all your expenses. Subtract your total expenses from your total income. If the number is positive, congratulations – you’re spending less than you make. If it’s negative, you will need to cut back on your spending in order to put money towards your home goal.
4. Budget to zero
If you end up with extra money in your budget, put it to work. Dedicate a certain amount toward saving for a home, while also building your emergency fund and paying off any debts.
5. Pick an account
Choose which bank account you’ll store your savings in every month until you can purchase your home. Here’s where it becomes important to choose a savings account that earns interest, because this is free money going towards your goal of home-ownership. Depending on how far away you are from your goal of owning a house, you may want to instead consider an investment account. Keeping your cash in a low-risk investment will allow it to grow faster than a savings account. Keep in mind that a savings account keeps your money liquid, while a (low-risk) investment account is still invested in the market, so this option is only ideal if you have a solid chunk of time to save left before you plan to access the money.
If you have some time before you need to access your savings to buy your home, you may want to look into investing the funds in your RRSP. The government offers the Home Buyer’s Plan, which allows you to withdraw from your RRSP early without paying withholding tax, as long as you are using the funds to pay for your first home.
6. Set up automatic transfers to savings
Once you’ve chosen your bank account, set up automatic payments. If you know you’ll save $500 every month, for example, have $500 automatically deposited into your savings account. This takes the guesswork and pressure off of having to do it yourself.
7. Review your budget frequently
By proactively reviewing your budget, you’re able to adjust your plan as needed so you don’t lose track of your goals. If any major events happen, like a raise or a drop in the housing market, re-evaluate again.
How much should I budget for a down payment?
While housing costs may vary, the down payment will be the biggest upfront cost for your home. The minimum down payment you’ll need depends on the cost of the home you want to buy. Keep in mind too that some institutions may require a higher down payment if you are self-employed or have a low credit score. The minimum down payment you can afford depends on your income and savings.
There are 3 tiers which determine the minimum down payment required:
- If the home you want to purchase costs $500,000.00 or less, the minimum down payment is 5.00%.
- If the home costs between $500,000.00 and $999,999.99, the down payment is 5.00% on the first $500,000.00 and 10.00% on the remaining cost.
- If the cost of the home is greater than $1 million dollars, the down payment must be 20.00%.
If your down payment is less than 20.00%, your loan is considered a “high-ratio mortgage” and you’ll need to pay for mortgage loan insurance. This additional insurance provides the lender protection should you default on your mortgage. Because mortgage loan insurance is commonly obtained through the Canada Mortgage and Housing Corporation, it is often referred to as CMHC insurance. Even with a 20.00% down payment, lenders may require you to purchase mortgage loan insurance if your credit score is low or if you’re self-employed. Premiums for mortgage loan insurance typically range anywhere from 0.60% to 4.50% of your mortgage.
Compare savings accounts in Canada
Once you’ve determined your plan for home ownership, it’s time to get saving. Keep your house-budget in one of these savings accounts to earn interest.
How much of my income should I spend on my mortgage payment?
This varies based on your unique circumstances, but most professionals recommend spending no more than 30% of your gross monthly income on housing costs. This percentage includes mortgage payments, insurance, property taxes and any homeowners’ association fees.
What is the 50/20/30 budget rule?
This popular budgeting rule states that you should spend no more than:
- 50% of your income on needs — including housing, transportation and food
- 30% on wants — including dining out, shopping, entertainment and travel
- 20% on savings — including debt payoff and reaching long-term financial goals
Some other upfront costs
The down payment is not the only cost you’ll have to pay out in order to purchase a home. Some other important costs you’ll need to add to your budget are:
- Closing costs. Closing costs are a combination of various legal or administration fees. These could include the cost of a lawyer to prepare and notarize official documentation and a “land transfer tax” to register the property in your name. The land transfer tax can usually be anywhere from 0.10% to 3.00% of the cost of your home. Total closing costs usually run anywhere from 1.50% to 4.00% of the cost of the home, depending on your lender. This means if you purchase a home for $300,000.00 with a 3.00% closing cost, you’ll pay $9,000.00 upfront – on top of the down payment.
- Taxes. Various other taxes may also apply. For example, if you’re buying a newly built home you’ll have to pay either GST or HST when you purchase it. Applicable taxes will vary depending on the conditions of the sale and the legislation in your province or territory.
- Full home inspection. Once you find a home, you’ll want to have it professionally inspected for any potential issues. Inspection costs vary by location and size of the home.
Additional ongoing expenses
Once you purchase a house, there are recurring expenses to budget for besides your monthly mortgage payment:
- Repair costs. Consider the size and age of your home when budgeting for repair costs. If you buy an older home, you may want to budget more per month than you would a brand new home. If your air conditioner broke, for example, it could cost around $5,000.00 to replace it.
- Maintenance costs. This includes any recurring monthly costs such as lawn care, pest control, pool care and fireplace upkeep.
- Utilities. An average-sized household can spend around $4,800.00 a year on utilities. Similar to maintenance and repairs, your utilities could be more depending on the age and size of your house and how many people will be living in the house. Newer houses will tend to be better insulated for temperature control and be fitted with more energy-efficient lighting and appliances, all of which helps reduce your utility expenses in the long run. Be realistic when budgeting for these new expenses.
- Property taxes. You’ll have to pay this tax yearly, usually in a single lump sum or as monthly installments. You’ll typically need to pay between 0.5% to 1.25% of the value of your home, but the exact amount will be determined by the municipality of the province or territory where you live.
- Home insurance. It’s a good idea to get home insurance to protect your home and valuable belongings from unexpected damage like theft or fire. The cost of property insurance will vary depending on the value of your home and its insured contents, as well as which insurer you choose to go with.
Tips to budget for a house
Other ways to budget for house payments
There are other methods that can help you cover costs or accelerate savings, such as:
- Special offers. Lenders often run special promotions. These deals can include mortgage rate guarantees, money off closing costs, waived application fees and more.
- Cashback rewards. If you receive cash back from credit cards or purchases, stash away this extra money every month as you save for your house. These little amounts may not seem like much, but they add up over time.
- Interest. Does your bank account earn interest every month? Save this spare change to help you reach your monthly savings goals.
- Tax refunds. Boost your savings by depositing next year’s tax refund into your housing fund.
- Extra money. Most of us receive some form of extra money throughout the year whether it be money from a birthday, holiday, or side hustle. Saving these extra dollars will help you reach your savings goals even quicker.
How to save for a house
Budgeting software and apps to help you budget for a house*
|You Need a Budget (YNAB)||US$84.00||No||PC|
* The prices and features for the products listed in this table are accurate as of January 14, 2020.
Deciding to purchase a home is an exciting time, but being financially prepared is crucial. Before you begin working on your budget, consider comparing bank accounts that accrue interest and allow you to save for your house automatically. Once you have enough money saved up to make your next move, check out our guide to mortgages in Canada.