Should You Invest Your Down Payment?

by Barry Choi September 12, 2016 / No Comments

Saving for a down payment is tough. To enter the housing market, you need to save a minimum of 5% on the first $500,000 of the home price and 10% of the amount above that price. The problem is many people find they can’t save enough so they wonder if they should invest their down payment.

I’ll tell you right now that there’s no easy way to make your money grow fast. Some people just assume there are ways you can invest your money with no risks while getting an annual return of 5% or more. That’s not how investing works. There’s always going to be a risk versus reward factor. But when it comes to your home down payment, you might want to play it a bit safe.

Understand your timeframe

When you plan on buying your home will help determine what you do with your money. If you expect to make a home purchase in the next two years, you should keep your money in a high-interest savings account. The returns are relatively low but you won’t lose money, which is important since you’ll need that money in a short period of time. Alternatively, you could look at GICs (and search for the best GIC rates). But GICs are locked in for a certain amount of time so you should use a high-interest savings account in case you find your dream home tomorrow.

Now, if you’re positive your timeframe is closer to five to 10 years, you have a few more options. With a longer timeframe, you can afford to take more risks with your money since you’ll have more time to recover in the event the stock market drops. As you get closer to the end of your timeframe, you’ll want to have your money invested in safer products. The last thing you want is for your money to drop in value right before you need it.

Risk tolerance

Now there’s technically nothing stopping you from investing in whatever you want—it’s your money after all. Riskier investments such as stocks have the potential to give you much higher returns but they can just as easily go down in value. In other words, your investments could go up 20% but they could also go down 20%. How much risk are you willing to take?

Also, it’s not like you need to put all of your savings in the stock market. You could invest just a small part of it in stocks if you’re willing to take on a little bit of risk.

You might already be invested

If you have saved in money in an RRSP and you’re a first-time homebuyer, you can withdraw up to $25,000 as part of the Home Buyers’ Plan (HBP). This applies to each person (as long as you’re both first-time buyers) so if you’re buying a home with your partner, you can withdraw up to $25,000 each for a total of $50,000.

Also note that starting in the second year after you withdrew money from your RRSP, you’ll need to repay the money you withdrew. Since you have 15 years to repay the withdrawals, you must repay one-fifteenth of the total amount borrowed every year until the full amount is paid back. If you’re unable to do so, the money you don’t pay back will be considered taxable income.

The final word

Personally, I think it’s better to not invest your down payment in something risky. If you do want to invest in something with a high amount of risk, wait until after you’ve purchased your home. Right now the best mortgage rates are hovering around 2% so instead of quickly paying down your mortgage, you could instead put the money in the stock market since you have a chance of making more than 2%. In the end, what you do with your money is a personal decision but at least now you know your options.

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Flickr: Andreas Poike