It’s something you have likely heard dozens of times before if you’re planning to buy a home: You must have enough saved up for a down payment! While it’s recommended you put down 20% of your new property’s value, you can technically go as low as 5% on the first $500,000 of the home price or 10% on any portion above that price. Homes prices over $1-million require a 20% down payment as a minimum.
But how are you supposed to come up with all that money? As a Millennial, it may seem like an impossible feat - especially if you’re trying to buy into a market like Toronto or Vancouver where the average home price is rising by hundreds of dollars each month. Fear not, there are ways to make your down payment, have your home and live in it too! And one of the best ways to come up with that cash is through investing.
Since any down payment less than 20% requires you to purchase mortgage default insurance, you want to try and put down as much as possible. You’ll have lower monthly mortgage payments and you’ll pay less in interest over time. Here’s how investing can help.
Why investment account over savings?
While savings accounts always seem like a safe bet to store your funds, there’s something to be said for the return you get on investing money for that down payment. Through investing, you can purchase stocks, bonds and funds which will yield much higher rates of return than a GIC or Tax Free Savings Account. However, that return won’t happen overnight, and your investments can lose money when the markets have a bad day, week or month.
The good news is, if you can ride out the tides then your investments will ultimately increase in value. Historically speaking, the market has always recovered from downturns. Look ahead to the horizon and ask yourself if you’re okay with giving yourself a longer timeline to buy – think at least three to five years. If so, investing the money for your down payment may be a lucrative option for you.
What type of investment is best for you?
The first question to ask yourself is, how much risk can I tolerate? If you’re okay with seeing some ups and downs along the way and willing to take a chance, then an aggressive portfolio might be right for you. These tend to be heavier on stocks and lighter on bonds, and will be heavily influenced by what’s happening on the markets.
If you’re completely risk-adverse – and I admit I’m one of those types – then a conservative portfolio might be right for you. This is heavier on bonds and lighter on stocks. This is great for investors who plan to take that money out and use it within a three to five-year period. The drawback? If the stock market soars, you won’t see returns as great as your aggressive portfolio peers.
If you feel prepared to take on some risk, then a balanced portfolio could fit your needs. Exactly as it sounds, a balanced portfolio has some elements of aggressive and conservative portfolios and is a great mid-term investment.
Let’s use the example based on Wealthsimple’s investing program. Say you contribute a lump sum of $10,000 to start, and then $500 per month going forward:
| Investment Period | Conservative Model | Balanced Model | Aggressive Model |
|---|---|---|---|
| 3 years | $29,751 | $31,635 | $32,630 |
| 5 years | $43,940 | $48,374 | $50,796 |
| 10 years | $83,364 | $100,134 | $110,086 |
Based on this information, you could pocket more than $50,000 in five years’ time.
Compare the 5-year investment period figures above to the same investments made into a TFSA, High Interest Savings Account (HISA) or simply kept in a chequing account:
| Investment Type (5 year term) | Annual Interest Rate | Investment Total |
|---|---|---|
| TFSA | 5% | $46,920 |
| HISA | 2.5% | $43,286 |
| Chequing Account | 0% | $40,000 |
There are two things to keep in mind here. Because there is an annual limit on TFSAs, contributions exceeding this amount may result in a penalty tax. Furthermore, if you choose to leave your down payment in a chequing account, not only will it not earn any interest but you may also be hit with monthly bank fees – meaning your down payment will be worth even less. And let’s face it – it’s not a smart idea to keep that money in cash under your mattress.
With Wealthsimple, that $40,000 you have invested can grow to $50,796 in five short years – that’s a gain of $10,796. If you can wait 10 years, you can pocket $110,086 – a gain of $40,086. Just remember – the longer the investment term, the higher your return will be.
Other ways to increase your down payment
Depending on the market you are buying into, you might need a larger down payment. There are a number of ways to increase the amount you put into savings each month.
Start with a plan and write out your budget. See if you can increase your monthly payments by cutting out small purchases that you don’t really need. Make your own coffee, bring a lunch from home to work and don’t overspend on clothes that you won’t wear. If you have a few valuable items that are collecting dust, sell them through an online classifieds site. Contribute any extra money you receive – such as a work bonus, tax return or cash gifts – towards your monthly savings. Also, consider picking up a part-time job or freelance work on the side. Finally, don’t be afraid to ask for a little help – whether it be from family or friends. If you celebrate Christmas, tell them to skip the gifts or gift certificates and instead, help you save for your home.
A home is likely the biggest purchase you will ever make in your life. By giving yourself a longer time frame and investing the money you plan to use for your down payment, you have the opportunity to grow your money, put more down and lower your mortgage payments over time.
Want to see what your investments can do? Visit Wealthsimple today and invest in future you!
