Saving up for a down payment is the first step towards buying a home. You only need 5% down in Canada to qualify for a mortgage. However, where should you put your down payment?
In this low-interest rate environment the straight forward answer we all anticipate causes potential home buyers to fear that the money they’ve set aside isn’t earning them enough interest. Perhaps there are better places to put your money for a higher return.
Risk Tolerance and Understanding it
You can potentially earn more money with your down payment in plenty investment options such as ETF’s and stocks; however, they are a lot riskier. Although you could potentially earn a 5% return, you could also go down 5%. There is a certain reward for the risks you take. Unfortunately, risk-free investments that give you a high return do not exist.
You’ll need cash in the short term with a house down payment, so try to keep that money safe. To elaborate, you should have that cash in an account or investment that won’t drop in its value.
However, some will still decide to invest a part of their down payment if they’re willing to accept the risks. It’s up to you what you’re most comfortable with, as long as you understand the risks.
Your Down Payment, Where Does it Go?
Your bank: Everyone has a chequing and/or savings account, therefore, you can put your money there. However, the problem with that is those accounts offer almost nothing in the realm of interest.
High-interest savings account: This is the place to save for your home down payment. They are only available from online banks. They can offer a much greater interest rate since their carrying costs are not much lower compared to the Big 5 banks. People can be hesitant to commit to an online bank; however, if you’re a CDIC member, up to $100 000 of your money will be fully insured.
Guaranteed Investment Certificate (GIC): This is one of the safest investment options available. This option offers guaranteed return for a fixed amount of time. However, since this is a no-risk investment, the return is pretty low. If you need to access your money earlier, you will have to pay a penalty; therefore, it is probably a better idea to use a high-interest savings account.
Investment account: If you want to take the risk, investing your money can be worth your while. There is an excellent strategy for people who don’t have a time frame or have a decent amount of money saved up already. To sum it up, if the markets plummet, it might not even matter to you because you are allowed to wait for them to recover or you can use a portion of the money in your investment account for the down payment.
RRSP: You can withdraw up to $25 000 from your RRSP through the first-time home buyers’ plan. “You are considered a first-time home buyer if in the four year period you did not occupy a home that you or your current spouse owned”, as stated by the CRA. However, the money you withdraw should have been in your account for 90 days and you will eventually need to repay the withdrawal.
Tax Free Savings Account: Unlike it seems, this is not actually a savings account, more like a place where you can keep different assets or accounts. This is the best fit for long-term investments; however, it is also a good place to keep your money when planning on buying a home.
The biggest tip we have for your downpayment is to be realistic in your expectations, to avoid disappointment. Although putting your money in safe investment options may not be the most thrilling, you’ll at least know that you are safe from the money decreasing in value.