Saving for Your Mortgage Down Payment

For most people, it’s not the actual monthly payment that they think they can’t afford when it comes to their future mortgage, it’s the down payment. True, a down payment is a large sum of money that you’ll have to fork over all at once. And, with down payments being anywhere from 5% – 20% (and more if you really want to lower those monthly payments,) they can be tens of thousands of dollars. So how are you supposed to be able to save up that much? There are a few ways.
Home Buyer’s Plan
The Home Buyer’s Plan is a government program that allows first-time home-buyers to withdraw up to $25,000 from your RRSP for a down payment. While you do have to pay this money back, you have 15 years to do so and again, many people can make smaller, monthly payments but have trouble coming up with the actual down payment. If you’re looking to buy a home in the near future, you should already have the money in your RRSPs to use this strategy. Otherwise, it could be anywhere from 2 – 10 years before you have enough in your account to use for a down payment.
Mutual Funds
Mutual funds are a better option if you don’t plan on buying a home for 3 or more years. Mutual funds do carry some risk, but compared to other investment opportunities such as the stock market, they are much lower. When you invest in a mutual fund, your money will be placed into a portfolio containing many companies within one industry. Therefore, you’re not relying on one company or one brand to do well but rather, an entire industry, which make your odds and your returns much better.
Fixed-Term Investments
Fixed-term investments, such as GICs, are another way to save for a down payment with very little risk. It’s also one of the slowest, so make sure that you’re not going to actually want to buy a home for at least 5 years. With fixed-term investments, you know what the interest rate is (usually pretty low,) and you’ll know when the investment will mature (when it will be available for you to use.) If you do need to take that money out though, there could be harsh penalties and you could lose what you waited so long to save so be careful and make sure you know exactly what, if any, penalties you’ll face.
Canada Savings Bonds
Canada savings bonds are a type of fixed-term investment; but they are one that’s offered by the federal government and also can offer quite a bit more wiggle room than other similar investments. Upon maturation, you can ask your investor to simply put them back in and re-invest them, or you can take them out and use them for your down payment. You can also buy them for as little as $100, and if you want shorter terms as the time for you to buy a house draws nearer, those are usually available too. Be warned that CSBs usually also come with very low interest rates; so this way of saving for a down payment will also take a bit of time.
High-Interest Savings Accounts
A high-interest saving account is just that – a separate savings account that earns high interest. This is the best option if you don’t already have a large sum of money saved somewhere (such as an RRSP,) and if you don’t have a great deal of time to save the down payment. You can also usually take these out anytime you want with no penalties, and it only takes a few days for them to transfer into your savings account.