Freedom Life Planning

The Ultimate Guide to Financial Planning

Saving to Buy a Home

So you are planning to buy a new home in the future. Well you’ve come to the right place to start making that dream a reality.

In this article I will cover how to establish your savings target for this goal. Then I will recommend a savings and investing plan to achieve that goal while minimizing investment risk. As this is your future home that we are talking about, you do not want to take a lot of risk!

Establishing a Savings Target

If you’ve read my article on Making a Plan, you will know that the first step is establishing your goal. How much will your new home cost? When will you need your new home? Are kids on the way? Are you looking to move closer to work? Determine these factors by researching prices in the area that you are considering for buying your new home.




Let’s say that you want to move into your new home in 5 years, before your (future)kids need to start school. The home price for the home you want is $300,000. I recommend aiming to put 20% down. For Canadian home buyers, this allows you to avoid the need for mortgage insurance. For people in other countries, it’s a good starting point but you may want to check local mortgage law requirements to determine what amount you want to put down. I’m using these numbers as an example, I will cover different scenarios in this article.

Below is a table showing the required monthly savings amounts, assuming a 2% investment return per year, required to put 20% down on a home. I’ve highlighted the amount for our example above.

If your exact home price target or timeline falls between 2 of these values, taking the midpoint between the two numbers will provide a savings target to aim for. What we can see from the table above is that regardless of how much your home will cost, starting earlier to save will be a huge advantage. Even if you are a young single person and have no kids, make some assumptions and start saving! You can re-adjust in the future as needed.

The above table assumes you have no savings when you start. Starting from 0$. If you already have some savings set aside when you start your plan, do the following:

Home Price – (Current Savings X 5) = Effective Home Price

Then look up the “Effective Home Price” in the first column above.

For Example:

$300,000 Home Price – ($10,000 Current Savings X 5) = $250,000 Effective Home Price

This move’s us up one row in the column above going from a monthly savings amount of $950 to $792. This is a conservative calculation method that won’t take into consideration the small investment gains on your initial savings.

Now that you know your savings target, it is time to make a Budget to achieve it. See my article on Making a Budget for more details on this step.

Investing

For the short-term goal of saving for a home, the investing portion plays a smaller role. Especially if your schedule is under 5 years. However, it will take a little bit of effort to setup and then your money will grow on its own. It will definitely be worth it.

As this is a short-term goal, I recommend safe investments for saving for a home such as:

  • High Interest Savings accounts
  • Bond Index Funds
  • GICs

My preferred option would be a 25/75 split between High Interest Savings Account/Bond Index Funds.

Here are some specific examples for Canadians, however similar products will exist in other countries as well:

High Interest Savings Accounts – Low Return on investment in the form of interest payments. Very secure and almost no risk.

  • RBC High Interest eSavings Account – An easy to setup and use savings account that you access only through online banking. It pays a small interest rate (0.5% at time of writing). Be sure to read the fee structure and avoid transactions that will cost fees. It should be possible to take advantage of this account and pay no fees at all.
  • TD High Interest Savings Account – Requires a minimum balance of $5,000. Fee’s waived if your total transaction is over $25,000. (0.5% interest at time of writing on balances over $5,000).

These are only a couple of examples. As the return is very small on these high Interest savings accounts, I’d recommend checking what your current bank offers and perhaps using that one for the convenience of having all your accounts with one bank. You will likely see fee savings by keeping all your accounts together that outweigh small interest advantages of having an account with another bank.

Bond Index Funds – Low to medium investment returns. Small investment risk.

  • RBC Bond Mutual Funds – RBF1095, RBF1005, RBF1008, RBF1009
  • Bond ETF – ZAB, XQB, VAB

The main quality to look for in selecting a mutual fund or ETF Bond fund is a low MER (management expense ratio) and a good diversification in quality bonds. In general, ETFs will have a significantly lower MER, but will cost per transaction fees to buy them.

Other Considerations

For Canadians, if is your first time buying a home, you can take advantage of the First-Time Home Buyers plan. This allows you to take money out of an RRSP tax free to put towards a down payment on your first home. See the Government website on this for details here.

For Canadians who are not buying their first home, I recommend saving for it in your TFSA to avoid paying high taxes on interest accounts and bond funds. Be careful not to exceed your TFSA contribution limit while saving for your new home as the penalties can be severe. You can check your current TFSA limit with the CRA.

Once you’ve established your investment account, be sure to contribute regularly. I recommend either monthly or by paycheck deduction. It is very important that you avoid missing payments in order to reach your goal.

That’s all there is to it, now it’s time to get started!

Please be sure to check out other articles on this site for more details on specific topics touched on in this one.

Leave a Comment