Being a renter made me realize how important homeownership is.
When I first moved into my rental condo townhome in downtown Toronto, I got a great deal. It was the middle of the great recession, the unit was vacant, and the landlord was willing to make concessions to get qualified renters.
Fast forward a few years and the situation had changed. The economy recovered and the rent went up – way up. Meanwhile, the home stayed the same. As things like flooring and kitchen counters reached the end of their reasonable life, it wasn’t up to me whether they would be replaced. When the water heater sprung its umpteenth leak, it was the landlord’s call whether to replace it (he didn’t, and it would go on to flood my home again).
Some experts insist renting is the smartest choice from an investment standpoint. Houses come with property taxes and maintenance costs. And with the exception of very recent history, residential real estate doesn’t grow in value at anywhere near the same pace as the stock markets. Personal finance experts will tell you that buying a home is like buying a crappy investment with a negative dividend. You’re better off renting and putting the money you would have spent in better investments.
But these experts forget the real value of owning a home – control. Owning a home gives you control over whether you stay or go. It gives you control over whether the water heater is patched or replaced. It gives you control over whether kitchen counter is good enough. And, resolving a personal pet peeve of mine, it puts control of the appliances in the same hands that pay the utility bills.
(I also argue that simple economics wouldn’t permit rental housing to exist if it weren’t profitable, but that’s a blog post for another day.)
For me, it was time to buy a home. But to buy your own home, you need capital. The average price of a condo in Toronto was $470,000 in the first half of 2018. That means you need a minimum down payment of $23,500, plus closing costs – a few thousand dollars to pay for lawyers, adjustments and other surprises. To avoid mortgage insurance, you need a down payment of $94,000. Essentially, you need anywhere between $30-100k to buy an average condo in Toronto.
For the urban renter yearning for more, it’s time to start saving. Fortunately, there are lots of tools you can use to make savings easier, especially if you’re saving to buy a home.
The Home Buyers’ Plan (HBP)
It’s so perfect for first-time homebuyers they named it for them.
The Home Buyer’s Plan, or HBP for short, is a federal government program that allows first-time homebuyers to withdraw money from their registered retirement savings plan (RRSP) to buy a home. Each person can withdraw up to $25,000. If you’re buying with a partner, that means you can take out up to $50,000 of tax-free money to buy a home.
The catch is your HPB withdrawal needs to be paid back to your RRSP over the course of 15 years. Take out the full $25,000 and you owe your RRSP $139 per month over the repayment period. If you don’t make the payments, you’ll pay income tax on the portion you didn’t repay at your marginal rate.
But the benefit is you can put all your down payment savings into your RRSP and enjoy the primary advantage, which is savings on your tax bill. Every dollar you contribute to your RRSP is deducted from your taxable income in that year. You can stuff your RRSP full of cash, get a big tax refund, and then use the tax refund to add to your savings.
Even if you have money saved elsewhere, you can put it into your RRSP a few months before you buy a home and then take it right back out again. The money only has to be in your RRSP for 90 days before it’s withdrawn.
Just remember you can’t apply to make a withdrawal under the home buyers’ plan until after you’ve made an agreement to buy a home. You’ll need some liquidity during the house hunting process for your deposit and there could be other surprises, so keep some cash outside of your RRSP to cover these costs.
There are also some restrictions on the kind of home you can buy under the HBP. Check with the CRA before you get started, just to be safe.
Tax-Free Savings Account (TFSA)
If you’ve maxed out your RRSP contributions, the next-best tax shelter for a first-time homebuyer is a tax-free savings account. The TFSA doesn’t have any specific advantage for homebuyers, which is why it takes second place to the RRSP. But it’s a valuable way to save the money you choose not to put in an RRSP.
Awkwardly named, the TFSA is actually a program that allows you to make all kinds of investments without having to pay tax on your investment income. You can hold savings accounts, stocks, bonds, mutual funds, and ETFs in a TFSA and cash out whenever you want without any tax repercussions.
If you were born in 1991 or earlier you have $57,500 in TFSA contribution room available as of 2018, even if you’ve never opened a TFSA.
High-interest savings account
If you’re using the savings account your bank signed you up for when you were a kid (shout out Little Leo Savers!), you’re probably missing out on a lot of potential interest. The big banks have savings accounts that pay as little as 0.05% interest, but there are high-interest savings accounts on the market that pay way more. The best savings account rate in the market is currently 2.30%.
The interest rate you earn on your savings account doesn’t seem like it should be a big deal, but it makes a big difference over time. If you save $100 per month for five years at 0.05%, it will grow to be worth $6,007.63. At 2.3%, it will grow to be worth $6,364.35. That’s over $350 in free money just for upgrading your bank account.
Depending on your timeline, a high-interest savings account can be the best option to save for a down payment. They’re not subject to the ups and downs of riskier investments, and it’s easy to withdraw your money when you need it. Depending on your bank, you may be able to transfer money from your high-interest savings account to your chequing account and access it in as little as one or two days.
Guaranteed investment certificates (GICs)
But what if it’s too easy to withdraw money from your savings account?
One of the hardest things about saving money is keeping it saved. You start the month with good intentions, transfer your cash from chequing to savings, then something comes up and you take it back out.
If you’re guilty of dipping into your savings, you might want to try investing in guaranteed investment certificates (GICs). GICs lock in your money so you won’t be tempted to withdraw. You can get terms from 30 days to as long as 5 years. The best GIC rates in Canada currently start at 2.80% for a 1-year commitment, so you can earn a fair bit of interest, too.
The time commitment can be a downside too, however. If you’re investing in GICs with the goal of buying a home in mind, make sure you choose a GIC term that lets you access your cash a few months earlier than you think you’ll need it, just to be safe.
You can hold GICs in your RRSP or TFSA, so they offer a lot of flexibility – just not enough to let you jeopardize your down payment savings because a new iPhone came out.
Just get started
If you find all this talk about RRSPs, TFSAs, savings accounts and GICs intimidating, take a deep breath. You don’t need to be an expert, but if you want to buy your first home you do need to start saving. Any savings are better than none, even if it’s just cash under your mattress.
But once you’ve started, you can help grow your savings faster by taking advantage of the accounts, investment options and tax shelters available to you. The faster you can take control of your savings, the faster you can take control of your home.
- Get Ahead of RRSP Season
- Saving for a Home in Canada’s Two Priciest Markets
- Check: Steps to Getting a Mortgage