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Becoming a homeowner is no easy feat. Besides going on house-hunting trips, searching for the ideal lender, and doing endless paperwork, one of the greatest challenges is getting a mortgage. Getting approved for a mortgage requires a sizable financial commitment, which means you’ll have to create and implement a detailed savings plan to accumulate the funds needed.  

Costs to Consider When Budgeting and Saving For a Mortgage

Gaining an understanding of how much money you need to save for a mortgage is crucial. You want to be sure that purchasing a home will enrich your life and not cause you financial and emotional hardship. 

So what is a good place to start when assessing how large of a mortgage you can afford? A go-to rule of thumb is to avoid spending more than 25% of your take-home pay on your mortgage. Because your mortgage will likely be your largest expense, it’s prudent to familiarize yourself with your spending habits; you want to be certain you can comfortably pay all your bills without running into cash flow difficulties.

When budgeting for a mortgage, you’ll also need to consider the following factors.

Debt-to-Income Ratio

Another financial metric to keep in mind is your debt-to-income ratio, which is your monthly debt payments divided by your gross income. Ideally, this ratio should be 30% or lower. If you already have considerable debt obligations, adding a sizable mortgage on top of that could prove to be burdensome. Also, lenders use this ratio to gauge your ability to make consistent mortgage payments. An abnormally high percentage could be a red flag that you’re more likely to default on your mortgage. As a result, you’ll face more difficulty trying to secure a mortgage with a low-interest rate.

Down Payment

By law, the minimum down payment you’re required to put down in Canada is 5% of the purchase price. This amount applies to the first $500,000. If the home you’re purchasing is more than $500,000 but less than a million, you’ll need to put down ten percent on every dollar above $500,000.

Find out if you can get a no down payment mortgage.

Though you may opt to contribute only the minimum amount, aim for a down between 10% and 20%. A larger down payment is advantageous for several reasons: you’ll increase your ability to bid on the price of the home, you’ll be better protected from property price declines, and you’ll be liable for less mortgage insurance (you may even be able to avoid it altogether).

CMHC Insurance

If you’ve made a down payment of less than 20%, you’re required to pay mortgage insurance. The Canada Mortgage Housing Corporation (CMHC) provides most of the mortgage insurance in Canada.

The amount of mortgage insurance you’ll have to pay will depend on your home’s purchase price and the size of your down payment. A more expensive home will result in higher insurance. Conversely, a higher down payment will translate into lower insurance. You can avoid paying mortgage insurance altogether by making a down payment of 20% or more.

The insurance premium is typically added to your mortgage and paid off over time in your scheduled mortgage payments. You also have the option of paying it with a one-time lump sum payment.

Appraisal and Inspection 

Your mortgage lender may require that an appraisal be done on the home you intend to purchase; they want to be certain it’s worth its purchase price and can cover any losses should you default on your mortgage. You will also want to have a professional inspect the property and report on its condition to ensure there aren’t any unwanted surprises. Expect to pay several hundred dollars each for an appraisal and inspection.

Closing Costs 

Closing costs are one-time expenses associated with a home purchase. They may include legal fees, title insurance, land transfer taxes, moving expenses, land survey fees, and prepaid utility bills. You should budget for a cash outlay of between 2% and 5% of the home’s selling price.

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How Much Time Do You Have?

While creating a budget is critical, you also need to create a time frame for accumulating the funds necessary for your mortgage. You should know how much you need to save and how long it will take you to save.

For example, if you’ve determined that you’ll need $50,000 in 4 years’ time, you can calculate the amount required to save each month. Assuming you start with nothing and invest in a financial asset that generates a 4% annual return (interest compounded monthly), you’ll need to save approximately $963 each month to reach your goal.

How To Save For a Mortgage? 

There is a multitude of ways you can save for a mortgage. Some are easy to implement, while others will require some creativity and sacrifice.

Grow Your Savings 

Make your money work for you by investing strategically to generate returns in safe investments. Some great places to invest your money include:

  • Short-term investments: These include money market funds, GICs and government bonds. They will provide you with modest returns over a short time frame with little risk. You can create an investment portfolio on your own, using a robo-advisor, or with an investment specialist’s assistance. Make sure to develop your investment portfolio within a Tax-Free Savings Account (TFSA) to take advantage of tax savings. Any amount you earn in a TFSA is not taxable and can be withdrawn at your discretion.
  • High-interest savings account: A savings account is a great option if you want to access that money in a few years. Keep an eye out for special deals offered by banks. Some high-interest savings accounts come with stipulations, such as a minimum deposit requirement and withdrawal restrictions, so ensure you read the fine print.

Revaluate Your budget 

If you need to collect some extra cash to help obtain your mortgage, scrutinizing your spending habits is a no-brainer.

  • Cut costs: Some of the ways you can cut back on expenses include buying groceries in bulk, shopping for items when they are on sale, preparing more home-cooked meals, negotiating with your cable and internet provider for lower rates, creating a home gym, and using public transportation. Employing a little frugality will go a long way toward building up your savings.
  • Save money on rent: examine the possibility of moving into a more affordable apartment. Temporarily moving into a smaller living unit in a less affluent neighbourhood could help immensely. Another option is to find a tenant and rent a spare room, should you have one. This way, you can create a passive income stream without the hassle of moving into a new apartment.  

Check out the 50/20/30 rule for better budgeting.

Use Budgeting Apps

Instead of typing endless lines of data into a spreadsheet, consider using a budgeting app. These apps track your spending and alert you to instances where you’re deviating from your budget. Some also help optimize your debt repayment plans and automatically invest your spare change into a savings or investment account. 

Ways to Make Your Mortgage More Affordable

There are numerous ways to make your mortgage more affordable, so be sure to acquaint yourself with the available tools and strategies. Some ways to keep the cost of a mortgage down include:

  • RRSP Home Buyers’ Plan: This RRSP Home Buyers’ Plan permits you to withdraw up to $35,000 to put toward your down payment. Though early RRSP withdrawals are subject to taxation, they are exempt if they are used to purchase a home. However, the funds you “borrow” must be repaid into your RRSP account over 15 years, with a minimum payment required every year. If you fail to repay the money, it will be treated as income, and you’ll have to pay tax on it.
  • A good credit score: A good credit score is one of the keys to obtaining a mortgage with a low-interest rate.
  • Home Buyers’ tax credit: This is a tax credit that allows you to claim a $5,000 non-refundable amount when you file your taxes. It translates into $750 in tax savings, reducing the costs associated with a home purchase.

Final Thoughts

A mortgage will likely be the most significant liability you’ll be responsible for – and for a very long time. As you prepare to take the necessary steps toward acquiring a mortgage, keep the following in mind:

  • Don’t forget to have an emergency fund: An emergency fund should be able to cover your regular expenses over three to six months. You may run into emergencies such as unforeseen medical bills, car repairs, or the loss of your job.
  • Be aware that your time frame can change due to unexpected costs: Build some flexibility into your savings plan and be prepared to make sporadic adjustments should your financial situation change.
  • Be conscious of your debt load: Too much debt can hinder your ability to save money and properly service your mortgage. Ensure you do everything possible to reduce the amount of debt you’re carrying, especially credit card debt.

Looking For The Right Mortgage Lender?

If you’re in the market to purchase a home and aren’t sure about your mortgage options, Loans Canada can help match you with a lender in your area.

Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.

Mark Gregorski avatar on Loans Canada
Mark Gregorski

Mark is a writer who specializes in writing content for companies in the financial services industry. He has written articles about personal finance, mortgages, and real estate and is passionate about educating people on how to make smart financial decisions. Mark graduated from the Northern Alberta Institute of Technology with a degree in finance and has more than ten years' experience as an accountant. Outside of writing, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.

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