Great insight from Genworth on saving for your down payment!
Saving and Sourcing a Down Payment
As you get ready to buy a home one of the first things to think about is your down payment. In Canada, the minimum down payment ranges from 5–20% depending on the price of your home.
- 5% under $500,000; and
- 5% on first $500,000, 10% on each dollar between $500,000 and $1million.
Because down payments can be considerable sums of money—especially in large cities like Toronto and Vancouver where the average detached house price is over $1 million—homebuyers are becoming more creative and resourceful in finding money for down payments.
Here are the most common ways people source their down payments:
Savings: RRSPs and TFSAs
Saving up over time is the most common way to build up your down payment for a house or condo.
To make the most of those savings, you can opt to put them in a tax saving vehicle like a TFSA or an RRSP. Once your money is in a registered account you can choose what to invest in. Making a decision between a GIC, mutual fund, or ETF will depend on your risk tolerance and the time horizon of your savings. It’s best to speak to an investment advisor to determine your strategy.
TIP:
Putting a modest amount each month into savings—$200 or $400 per month—adds up quickly. ($400 per month is $4,800 every year!
The biggest benefit to putting funds in your RRSP is that you can do so before paying income tax, so you’ll be able to hit your savings goals faster. Here’s a summary of the differences between your TFSA and RRSP.
TFSA – money put in is from your after-tax income; money taken out is tax free.
RRSP – money put in comes from your before-tax income; money taken out is tax free up to the first $25,000 if you’re a first time homebuyer using the RRSP Home Buyers’ Plan, but must be repaid.
- Note: Budget 2019 proposes to increase the Home Buyers’ Plan withdrawal limit to $35,000. This would be available for withdrawals made after March 19, 2019.
If you are going to put savings into your RRSP, it’s important to understand the Home Buyers’ Plan to make sure you can access the funds without paying RRSP withdrawal tax.
If you are a first-time homebuyer, the Home Buyers’ Plan allows you to take $25,000 from your registered retirement savings plan (RRSP) tax-free to put toward your down payment. If you and your spouse or co-purchaser are both first-time buyers, you can each take advantage of this, for a combined total of $50,000.
Things you should know about the HBP:
- 39% of first-time homebuyers utilize the HBP to put towards their down payments.
- The Home Buyers’ Plan is considered a loan from your retirement, so it must be repaid within 15 years. You have to pay back 1/15 of the total amount borrowed over a period of 15 years. If you miss a year, you’ll have to pay tax on that amount, as it’s considered a regular withdrawal from your RRSP.
- Your repayments start the second year after you withdrew funds from your RRSP.
- The money must have been in the RRSP for 90 days before you can withdraw it.
- If you are currently selling your home and are now going to rent, you will be eligible for the HBP after four calendar years have passed. For example, if you sold your home on April 1, 2014, you’ll be eligible for the HBP on January 1, 2019.
For savings intended for your down payment, it usually makes sense to put the money in your RRSP if you’re a first-time homebuyer eligible for the Home Buyers’ Plan; after you’ve hit the $25,000 mark, it’s likely best to build up your TFSA.
On the flipside, your TFSA withdrawals are always tax-free. If this isn’t your first home purchase, it would be wiser to save in a TFSA.
Gifts from immediate family members
31% of homebuyers source at least some of their down payment from family members.1
It’s also becoming more common for parents to invest in a property with their children, and then move into a portion of the home.
For more information, read our education page on living and buying with others.
Sell your car
Especially in large cities like Toronto or Montreal, it’s common for people—especially young people—to sell their vehicles to afford to buy their first home. With easy access to public transit, a car may not be as necessary as a down payment to venture out and live on your own.
Home Equity
If you’re looking at investment properties and already have a home paid down, either partially or in full, you could use a Home Equity Line of Credit (HELOC) to borrow against the principal of your home. By borrowing against one home, you may be able to afford a down payment for a second property.