In our last post we talked about how saving up for a 20 per cent down payment on a $295,000 home would mean saving up $59,000 – just for the down payment. Not surprisingly, that’s far out of many homebuyers’ reach – especially first-time homebuyers. The problem is that the rate of return on savings accounts is extremely low right now, because our interest rates have been so low for so long. So in this low-rate environment, how is anyone supposed to get together tens of thousands of dollars for a down payment?
There are a few options you have available to you. As you can see from the chart made by TD Bank below, you can make your down payment using a credit card, by getting help from friends and family, using a line of credit, or just good old savings.
Because more than half of Canadians choose to use savings (which is really the smartest way,) that’s the option we’ll be focusing on here.
The Home Buyers’ Plan
If you have not owned a home in four years, the federal government will allow you to borrow $25,000 from your RRSP. If your spouse is also going to be on the title of the home, they can also borrow $25,000 from their own RRSP account. Keep in mind that you are still borrowing although with very little cost to you. Beginning the second year after withdrawal, you’ll have 15 years to pay back any funds you borrowed from the account. Should you ever miss a year’s payment, that will be included in your taxable income – meaning you’ll have to pay more in taxes.
Mutual Funds
Mutual funds can be a risky savings strategy, and you must make sure that you’re not going to buy your home for at least three years, as your money will be locked away. With mutual funds you invest in a portfolio, typically filled with companies pertaining to one or two industries. When you’re trying to save up for a down payment, it can be a wise move to invest in a real estate mutual fund. This way, if the market becomes volatile and your investment in mutual funds goes down, at least you’ll know the value of your home has also dropped and so, you’ll need fewer funds to make that down payment.
GICs
After mutual funds, GICs are another popular way to save for a down payment. With this investment you’ll still be locking away your money for a defined period of time; so you must first make sure that’s something you want to do. GICs also don’t grow as quickly as other investments, due to the low interest rate.
Canada Savings Bonds
CSBs are a fixed investment vehicle that are offered by the federal government. These have very low interest rates but are considered to be some of the safest investments as they are backed by the federal government. Keep in mind though that like mutual funds, your money will be locked away for a period of time – leaving you short if you happen to find your dream home while your money’s behind bars.
High Interest Savings Accounts
There are a number of different high interest savings accounts that banks offer. Many of them can even be found online. Set up automatic withdrawals from your regular chequing account, and you won’t even have to worry about forgetting to make a payment to your high interest savings account. These can be good investments if you don’t have a lot of time because they won’t lock your money up for a long period of time. The funds can be put into your chequing account within a couple of days. And, there’s no debit card associated with these accounts. So you don’t have to worry about using up all those funds on impulse buys.
There are a number of different ways to save up for your down payment – even if today’s high prices and low interest rates seem to be making it near impossible. Remember, when trying to find the best savings vehicle for you, you need to seriously consider how long you want your money locked up for. While choosing an investment that will lock your money away for a certain period can get you bigger returns, you’ll also be out of luck if you find your dream home during that time.
