In a sluggish market, it’s tempting to squeeze every possible penny out of your hard-earned dollars. You also want to make sure you spend them wisely – so when you’re on the hunt for the perfect home, that can either mean waiting it out or jumping at a sudden opportunity.
Tragically, these two notions clash. When you’re saving in a short term, it’s a terrible idea to keep your money where it can be slashed in a market swing; the prospect of high returns means high risk for your principal. Imagine you have saved $50,000 for a down payment for a first home – then imagine losing 20 per cent or more in a market fluctuation.
Short-term saving, experts say, is a conservative game. If you’re planning to spend your savings in the next year – or even two years – your best bet may be sticking to the low-growth wasteland of a high-interest savings account, especially if you’re on the hunt to become a homeowner.
“Don’t miss the bigger picture while trying to focus on squeezing every penny out of what may be a relatively small deposit,” says Cynthia Caskey, a Toronto-based vice-president and portfolio manager with Toronto-Dominion Bank Wealth Private Investment Advice. The flexibility you need to buy a home, she says, outweighs the risks that come from putting down-payment money in higher-interest assets.
Putting that crucial cash into the markets can always mean a gain, but it can also mean a loss. “Hoping the stars and moon align is not an investment strategy,” she says. The best route (which will make the money-hungry among us squirm) is a high-interest savings account.
“We’re suggesting that if you do need money for a distinct purchase within two years that you start collecting those assets in a high-interest savings account,” Ms. Caskey says. “We find that that’s a better interest rate than money-market funds, in many cases, and there’s the safety and security of it.”
This also keeps your money liquid, giving you quick access when you need it. Security and flexibility are important because you never know exactly when your closing date will be.
Putting money in stocks means you’d have to sell them when you need cash, coming with the likelihood of a loss. Even blue-chip dividend paying stocks, such as banks and utilities, can make dollars disappear in the short term, or react poorly in a volatile interest rate environment, Ms. Caskey says. And buying cashable GICs or discounted bonds sounds like another tempting conservative approach to saving, but there can be interest penalties for cashing them in early.
“So that’s where a high-interest savings account has flexibility, and guarantees certainty and complete cashability,” she says.
The conservative approach is well-backed. “You really don’t want to lose money here,” says Jamie Golombek, a managing director with Canadian Imperial Bank of Commerce’s Private Wealth Management division. “If you know that you’re going to use that money in a year, or even a year-and-a-half, I think the best thing to do is lock it into a high-interest savings account. If you’re looking for higher returns, by definition, you’re going to take on a higher level of risk.”
There are ways to squeeze extra dollars from a HISA, though. Parking it in a tax-sheltered environment, for example, helps to keep costs down. A tax-free savings account would be the simplest option, as long as you’ve got space below the $25,500 limit. “That often is quite a good idea, simply because interest income on high-interest savings is taxed at the highest marginal rate,” Mr. Golombek says.
If you haven’t used your federal First-Time Home Buyers’ Tax Credit yet, you can also shelter up to $25,000 of down-payment savings in an RRSP.
If that down payment is also large enough to avoid mortgage loan insurance – usually 20 per cent or more of the total mortgage cost – Ms. Caskey points out that you’ll be able to get even more out of your money.
“Let the government actually contribute as part of your down payment,” she says. “What a great partner to have. Stretching your dollars by 25 per cent or higher can make a meaningful difference for folks trying to get into the marketplace. ... That’s a way that you can stretch your dollars further, and not take on undue risk.”