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Where to Save the Down Payment for Your Home

Saving a down payment for a home is a multi-year endeavour for most Canadians. According to a recent RBC survey, 43% of millennials want to buy a home in the next two years.

The process of saving up for a home requires discipline. Keeping your money in a simple savings account that pays a small amount of interest may be doing you more harm than good. There are many different financial products you could use when saving for your down payment. Let’s look at each option and discuss when they’re most appropriate.

High-interest savings accounts

If you’re planning on purchasing a home within the next 12 months, a high-interest savings account is a good place to keep the money for your down payment. You can access your money at a moment’s notice for expenses like your deposit, appraisal fees, and home inspections.

Interest rates vary widely from lender to lender so think twice before opening an account at your local bank. Do your research and shop around. You should choose a lender that has higher interest rates because a few points can make a different in the size of your down payment.

For example, if you’ve saved up $30,000 and you choose the Scotiabank Momentum Savings Account, you’ll earn 1.5% on your money. If you keep your money in this savings account for a year, you’ll earn $450 in interest.

But if you shop around and deposit your money into the EQ Bank Savings Plus Account, you’ll earn 3% interest. If you keep your down payment in this account for a year, you’ll reap $900 in interest. That’s twice as much as what you’d get with the Scotiabank account.

Once you’ve settled on an account, be sure to check whether the savings account has tiered rates. An account with tiered rates requires you to maintain a minimum balance to qualify for the advertised rate.

For example, the Scotiabank Momentum Savings Account requires a minimum balance of $5,000 to be eligible for its advertised interest rate of 1.5%. If the balance is less than $5,000, the annual interest rate is 0.1%.

High-interest savings accounts are a good option if you’re planning to purchase a home imminently or if you have enough financial discipline not to spend the amount you saved for your down payment on impulse purchases.

GICs

A GIC is a financial product that allows your money to earn a guaranteed rate of return over a set period (called a term). When you buy a GIC, you’re investing your money with the lender and it guarantees the return of your money plus interest after a term.

Term lengths vary from 30 days up to 10 years and the guaranteed interest rates vary depending on the duration of the term. When you buy a non-redeemable GIC, you can’t withdraw your money without incurring a penalty (usually forfeiting interest earned and sometimes paying a fee). You can buy a redeemable or cashable GIC but the interest rates are lower.

Receiving a competitive interest rate on your money is a key benefit of the GIC and so is having the money locked away. If you aren’t planning on buying a home within the next year, investing in GICs is an excellent way to take away the temptation of spending that money.

Just how much can you earn with a GIC? If you check the best GIC rates on Ratehub.ca, you’ll see that Oaken Financial is offering a one-year GIC with an interest rate of 1.95%. If you invest your $30,000 down payment in this GIC, you’ll receive your principal back plus $585 at maturity.

Mutual funds, ETFs, and stocks

The previous two options we looked at, savings accounts and GICs, are very secure places to keep your down payment. In both cases, your money will earn a guaranteed interest rate and you won’t lose any money.

If you aren’t planning on buying a home within the next five years or more, you could consider investing all or a portion of your down payment in stock mutual funds, exchange-traded funds (ETFs), or individual stocks.

You’ll enjoy the potential for a higher rate of return on your money, but you could also lose money if the market goes down. The longer you have your money invested, the greater chance of higher returns, which is why you shouldn’t use this option if you’re planning to buy a home within the next five years.

No matter where you decide to keep your down payment, make sure to save your money within a registered account like a TFSA or RRSP to avoid paying income tax on the interest you earn.

I currently have $25,000 saved to buy a home and I don’t plan on making a purchase for at least a year. And I’d like to have easy access to my money in case a particularly good home with a low list price comes along.

Because I want to keep my cash on hand and easily accessible, I’m keeping my money in TFSA and RRSP high-interest savings accounts. In your case, you need to choose the financial product that best suits your situation.

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Flickr: KMR Photography