It is comforting when I meet with younger Canadians who have not fallen into the debt trap and are starting to build their financial futures on a foundation of sound saving. For most of them, the early years of their careers will be spent examining where they will live and they are naturally drawn to buying a home. True, this has become much more challenging given the spike in home prices in recent years, yet home ownership is still achievable provided they keep an eye on affordability. The questions I often hear from these young savers is how to plan towards the time when they will put their down payment on the table?
The first step is to determine how best to save for this event. That will key off the amount of time between now and the home purchase. A short time frame will argue in favour of a near zero-risk strategy (such as a savings account, or GICs and other lower risk fixed income investments). A longer time horizon may allow for slightly more risk to be introduced, such as large cap equities. Where these investments are held will also be an important decision. While a bank account or straight GICs might seem simple, there will be tax implications from the interest earned, whereas if this money were held in a Tax Free Savings Account (TFSA), the tax issues disappear and the individual still has the flexibility of drawing out the required down payment whenever they choose.
Another option is to use the funds in a Registered Retirement Savings Plan (RRSP), under the first-time home buyer’s program. While some younger Canadians struggle with the decision of saving in an RRSP versus putting money aside for a down payment, they can indeed do both and get the immediate tax benefits of making contributions to the RRSP while they wait for the big day. Of course, any money taken out of the RRSP for a home purchase has to be repaid, but it is still a useful option.
At the end of the day, the most important thing for young Canadians to remember is to lay out a comprehensive financial plan that incorporates all of the options discussed.
Andrew Pyle, Branch Manager, Senior Wealth Advisor and Portfolio Manager
111 Hunter Street West, 2nd Floor, Peterborough