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Money for down payment

5044 Views 11 Replies 8 Participants Last post by  fephoo
I am currently putting some cash aside for a future down payment (probably in 3 or 4 years). I don't want to take high risk with this money but still I can't stand having it in a saving account (with a miserable 1% interest) or even a GIC (with max 3% for 5 years locked)....

Would it make sense to invest all the down payment money in a couch potato non registered portfolio (probably TD e-funds) with an allocation heavy on bonds ? Wouldn't I get a better return than saving interest rates or GICs ? and wouldn't it better tax wise ?

Thanks for your advice. Fab
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If you have a 3-4 year time horizon I would just put it in a GIC or high interest savings account. Emotions (eg frustration, impatience, powerlessness, etc) results in a lot of problems.
You may want to put it in an RRSP and then use the House Buying program. You will save on your taxes now and you can use that money to grow your RRSP even more.
I would first max out my RRSP as Berubeland said, and then I would invest with expectations for inflation and higher interest rates...
I would go with the GICs inside a TFSA is you have any room or outside tax-free accounts. The claim that the RRSP contribution credit helps your savings grow is wrong because the credit and all its growth gets taxed back on its eventual withdrawal (clarification in 2nd video of this series).

Using the RRSP plan for downpayment cash means you end up with a mortgage for 100% of your house. Don't think that because you owe yourself, it will be any less onerous. Think of it as owing the government, not yourself. They will enforce their terms strictly and powerfully.

A few year's of taxes won't hurt you. KISS
If you arn't already planning to max your RRSP, it is probably wise to place your down payment under RRSP and then use the HBP

Unless you are old or pay very low taxes I bet RRSP beats TFSA for this

RRSP would provide tax deferral from now until withdrawal whereas TFSA only provides tax free interest until you buy the house. You won't make much interest in 3-4 years anyways and if you lose money you wouldn't even be able to get capital loss under TFSA

I used HBP and I don't consider it borrowing from myself or the government... it allowed me avoid CMHA insurance and take advantage of RRSP room earlier and therefore extending the tax deferral. I don't expect to break the next tax bracket soon and I planned to pay into RRSP anyways (so I Don't consider it a 100% mortgage, buy rather paying less mortgage interest and benefiting more from RRSP)

Income tax deferral and not paying CMHA fees saves a lot
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But RRSPs are not about deferring tax. They protect from tax subsequent income earned on after-tax savings. (Clarification in 2nd video of this series). And investing in your own home is also protected from tax.
For the security and liquidity you need, you're stuck with high interest savings accounts or GICs, even though interest rates are the pits. At least open a TFSA so the interest won't be taxed.
Thanks all for your comments.

A few precisions :
- I save a down payment for a second house... planning on renting the current when I have enough to buy the second. So HBP may not be an option.
- With a GIC, I can't put contributions monthly which is what I want to do.

I am wondering what would be the return of a non reg. td e-series portfolio only constitued of CDN Bonds ? It would be pretty safe, and dividends would be better than just interest when considering taxes...
I guess I could do 2 parts for the down payment money :
- $10000 in TFSA td e-series CDN Bond (the max for 2010)
- the rest in non-registered td e-series CDN Bond

What do you think?
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It would be pretty safe, and dividends would be better than just interest when considering taxes...
Bonds pay interest though so they are no more tax efficient that the savings accounts.

Also, bond prices can/will fluctuate, so I'll have to reiterate keeping the money as cash. You really have to ask yourself how important your timeline for buying your house is. In anything other than cash, you risk delaying your purchase by a year or more if there happens to be a dip in price at the exact time you want to buy a house.

Also, the upside benefit (maybe 2% interest) over a year or two is minimal. Say you have $15000 now, in two years, 2% extra interest in $300/year. Is earning an extra $600 worth the chance of NOT being able to buy a home if the fund value decreases?
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