Reader Mail: Best Way to Grow a Down Payment?

I received an email from Michelle the other day about the best way to grow her down payment savings for a house in 2 years time.  Here is the email:

 My husband and I will buy a house in about 2 years. We have no credit card debt or loans and usually we can put away between $500-$800 per month. We are trying to save as much as possible for a down payment. We have RRSP's but you can only use $20,000 towards a house. We will do that at the time. In the mean time we have an account that gives us about 3% interest on the money we are saving monthly. Currently there is $42000.00 there. How can we make this money grow faster in the next 2 years without locking it in?  Thanks for any suggestions.

To begin, I would like to say congrats for staying out of debt and putting away money every month.  That in itself, is a huge financial achievement.

So, the key question is, how to grow the down payment money as fast as possible without locking it in?  With the 2 year time line that you have, I think that investing in the stock market is out of the question.  I think that your best bet would be maximize your RRSP (for both of you), and put the rest in a PC Financial Savings account that pays 4% annual interest.

Also note that with the RRSP Home Buyers Plan, you can contribute $20,000 from EACH of your accounts.  So you can potentially use $40,000 from your RRSP's providing both of you qualify.  As for which investment vehicles to use inside the RRSP, if you're not willing to lock in your money, then a money market fund is among the few choices available.

Note that I'm not a financial advisor, so please take my advice at your own risk.  Note my disclaimer at the bottom of the page.

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Man From Atlantis
13 years ago

Hi Guys:

When you implement a strategy with a short time frame and you are some what dependent on others (bankers) it makes sense to tell them up front what you are going to do. You don’t want to deal with the issues at time of closing. People get different advice from different banks and even the same bank but different branches.

It is worth checking if you are going to borrow to contribute to an RRSP and then withdraw through the HBP after the 3 months.

Q Cash
13 years ago

Don’t you think Gates’ response could be a guest post :-)

WhereDoesAllMyMoneyGo.com
13 years ago

The caveat with the RRSP loans is that the money must be in the RRSP for 89 days otherwise you cannot deduct the contribution.

Aside from the RRSP loan comments, with respect to what to do with the money for investing, their hands are tied. You don’t want to risk your money with only 2 years to go. Having said that, you *could* buy strip bonds at a discount with a maturity in 2 years (AAA Gov Canada strips) – if interest rates go up, then you just hold to maturity and you know what you will get. If interest rates go down, then you can sell them early for a gain since they will get closer to par (ahead of schedule when interest rates go down).

The Financial Blogger
13 years ago

It took me forever to get to this comment! What is going on with the Server errors?

FP, I don’t mind if they have their 40K already or not. Basically, what is important is if the couple have non-used RRSP contribution. They will just leave more money into their RRSP after the purchase.

Man from Atlantis, just so you know, FP is right. The bank will tell you to know withdraw your RRSP funds but they have no right over it. Which means that your are totally free to withdraw all the RRSP’s you want without paying your loan. Whatever they tell you is BS. RRSP are not seizable assets.

Cheers,
FB.

Gates VP
13 years ago

OK, so to break this down:

Step 1: Get 40k into RRSPs (that’s 20k each).

Step 2: Ensure that these 40k are invested in correct “securities”, money beyond the individual 20k should probably be invested in the markets (i.e.: mutual funds, see elsewhere for advice). In terms of RRSP securities, the suggestions include GICs, Money Market funds, T-Bill funds, or even Canada Savings Bonds (all paying better than 3%). Note that links are a little everywhere, there are lots of options.

Step 3: Take the remainder of savings and find a really good interest rate for these: PC Financial, ING, etc. or one of the investments you used above.

Step 4: You likely just moved a big chunk of money to an RRSP, that carries a huge tax return. You have 2 years, but you’ll be getting several thousand back in April (likely 5-10k!) So plan for a place to put this money.

Assuming that you have: 20k in RRSP, 42k in investments and 600-800/month to save. I would detail the plan as follows (my personal advice).

Grab an accountant for an hour and make sure that you’re putting the right money in the right accounts for tax purposes. Your goal here is to have 20k each in RRSPs between the two of you. Dependent on the current arrangement, you may need to shuffle some things (hence the accountant). His “accounting advice” will pay for itself, so just expect him to charge you $300+ for a good sit-down.

FT and I are both suggesting a high-interest bank for your non-RRSP savings, but you can go with the same vehicle you’re using in your RRSPs. The benefit to using the bank is to have liquid cash and to have the ability to jump on opportunities. Having 20k+ in a bank account (not locked into GICs) can be a big lifesaver.

Once you’ve completed everything above, you’re done Phase 1. Phase 2 involves future planning.

What are you going to do with the 5-10k tax return?

How much are you going to continue to save to RRSPs? Once you take out the 20k, you’ll have 15 years to repay, that’s $111/month/person.

How much goes towards the rest of your house savings?

End of the day, you’ll probably want a mix like: 150/month/person into RRSPs, 300-500/month towards the home fund(s). It’s also worth noting that you’re likely spending far less in renting that you will be in owning. Check around the blogosphere, but I’ve seen numbers like 1000/month more. There’s a lot of reading materials here, but realize that it’s unlikely that you’ll have lower monthly expenses while owning and account for that as well. If you throw all of your money at the home and the RRSP payback, you’re throwing a lot of eggs in one basket.

I would plan to start putting some type of “non-house” money aside so that you don’t get trapped with everything invested in the house.

FourPillars
13 years ago

Man from Atlantis – you are not allowed to use rrsp assets as collateral for a loan. I believe an rrsp loan is like a personal loan.

Mike

nobleea
13 years ago

Man from Atlantis;

Perhaps. I had no problems with the process. In fact BMO published a little brochure on how to do it, which is where I got the initial idea. I doubt they have the brochure anymore, it was at least 5 years ago.

Man From Atlantis
13 years ago

Be a little carful taking out a loan for an RRSP and then doing the HBP. You may find that the bank won’t allow you to cash in the RRSP accounts until the loan is paid off. Check first.

FourPillars
13 years ago

I think you guys are assuming that the couple doesn’t have $40k in their rrsp available for HBP?