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13 Nov

Where to grow your down payment


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You make your own avocado toast. You skipped your buddies’ Vegas getaway. Heck, you’re walking to work this summer so you can tuck extra toonies into your piggy bank. If you’re taking your down payment that seriously, you deserve to watch it grow. Wondering where to incubate that nest egg until it’s ready to hatch?

Read on for an introduction to three popular options. Talk with a financial adviser or bank representative to determine which one(s) may be best for you and your #goals.

High-interest savings account
High-interest savings accounts pay better-than-average interest. For convenience, you could open one at the bank or credit union where you have a chequing account. Or you may want to shop around in search of a higher interest rate. Your money (up to a limit of $100,000) is protected by the Canada Deposit Insurance Corporation (CDIC) and available when you need it.

Tax-free savings account
Tax-free savings accounts (TFSAs) traditionally offer less interest than high-interest savings accounts (yet that is not always the case, so, again, it never hurts to comparison shop). The distinguishing characteristic of TFSAs is that there’s no income tax on interest earned or on withdrawals – which you can make at any time.

TFSAs have an annual contribution limit: in 2018, that’s $5,500, but you can roll over any unused contribution room from previous years. If you want to open your first TFSA, you could move as much as $57,500 into it tomorrow.

TFSAs can be straightforward savings accounts, or they can contain investments like Guaranteed Investment Certificates (GICs) or mutual funds. There is a caveat, however. Take mutual funds: unlike cash deposits or most GICs, there’s no guarantee you’ll get back what you’ve invested. Markets fluctuate, which could work in your favour … or not. If you’re risk averse – as most first-timers often are – grow your TFSA with GICs and cash savings.

Registered retirement savings plan
As indicated by the name, registered retirement savings plans (RRSPs) are a retirement-savings vehicle. The Canadian government promotes saving via incentives: RRSP contributions are tax deductible. But you are penalized if you take your money out early – a withholding tax will be deducted up front, and the withdrawal amount may also be subject to income tax, depending on your total income. Ouch. So why park your down payment savings in an RRSP? One reason: The federal government’s Home Buyers’ Plan.

If you’re a first-time homebuyer, the Home Buyers’ Plan allows you to borrow up to $25,000 (tax-free) from your RRSP, so long as you pay it back within 15 years. If you have a spouse who also qualifies, you can each borrow that amount, up to a maximum of $50,000. Not bad, right?

TIP: For most first-time homebuyers, zero or low-risk savings accounts and RRSPs are the safest place to grow a down payment.

Schedule your savings
Once you’ve determined where to grow your nest egg, feed it with regular contributions. Budget an amount and pre-authorize weekly or monthly transfers from your chequing account to your savings account or TFSA. You can also schedule pre-authorized purchases of mutual funds or RRSP contributions.

Want to save even more? Look for account services that automatically transfer small amounts of cash from your chequing account to your savings account each time you use your bank card.

Saving that down payment will take discipline, but the payoff? Millions of homeowners agree: it’s worth it!