The Canadian housing market can be difficult to gauge at any given time, especially during times of new mortgage qualifications, news of sales decreasing, and forecasts of interest rates increasing in the near future. Under the current conditions, some potential home buyers may be conflicted; they may have a down payment, but they are not ready to buy.
So in the meantime, where can you park your down payment to get a higher return later? In Canada, you can get away with as low as 5% down to qualify for a mortgage, but if you’re willing to wait a little longer to buy a home, there are plenty of investment options where you can potentially grow your down payment, such as ETFs and stocks.
It should be noted, though, that while there is no such thing as a risk-free investment that will give you a high return, ETFs and stocks are much riskier investments. A house down payment, presumably, is cash you’ll need in the short term. So it’s best to keep that money relatively safe, in an account or investment that's easily accessible and likely won't drop in value any time soon. As it goes with all types of investments, you just need to decide what you’re most comfortable with, and more importantly, understand the risks of your decision.
Where can I invest my down payment?
At your bank
Everyone has a chequing and/or savings account so you could easily park your money there with no worries, but the problem is, these accounts offer little-to-nothing when it comes to interest.
High-interest savings account
This is arguably one of the best places to save more for your down payment. High-interest savings accounts are usually only available from online banks. And since they typically have lower carrying costs in comparison to the Big Five banks, they can offer you a much higher interest rate. Some people are hesitant to use an online bank, but if you become a member of the Canadian Deposit Insurance Corporation (CDIC), you can fully insure your money up to $100,000.
Guaranteed Investment Certificate (GIC)
GICs are some of the safest investments available. They offer a guaranteed return in a fixed amount of time but since this is literally a no-risk investment, the return is quite low. If you need access to your money earlier, you will likely pay a hefty penalty.
Investment account
If you’re willing to accept the risks, maybe investing your money is worth your while. This is especially a good strategy for people who aren’t on a set time frame or have a fair amount saved up already. If the market tanks, it may not matter to you since you can wait for it to recover, or simply use a portion of the money in the investment account for your down payment if you really need it.
RRSP
Did you know that if you’re a first-time home buyer, you can withdraw up to $25,000 from your RRSP through the Home Buyers’ Plan (HBP) for your down payment? You are considered a first-time home buyer if you’re a Canadian resident who has not lived in a home you’ve owned within the last four years. And if you’re purchasing the home with your spouse, you can both withdraw $25,000 each from your accounts under the HBP, meaning you could possibly have up to a total of $50,000 towards your first home. However, you will need to repay the money you withdraw, typically within 15 years.
Tax-free savings account
Despite its name, your TFSA is not actually a savings account. It’s more of a savings vehicle where you can hold different assets or accounts. TFSAs are best suited for long-term investments, but it’s certainly a good place to put your money if you plan on buying a home.
When it comes to your down payment, you need to be realistic about your expectations. Putting your money in “safe” investments may not sound glamourous, but at least you can sleep comfortably knowing your money will not decrease in value and you’ll have the room to cash out when you do finally decide to buy your home.
