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Home Buying

First-time homebuyers should strive for bigger down payment Add to ...

Carla Day-Reiner and Grant McVittie want to buy a home in Toronto, but with little saved they know it’s not going to happen overnight.

So, they’ve developed a plan to buy in two years — one that doesn’t resign them to dine on ramen noodles.

"At least now, we’re a bit more conscious about frivolous spending and prioritizing, but it hasn’t impacted what we’re used to," Day-Reiner said of their investment plan.

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"The way our adviser set up our plan, she took into consideration our lifestyle and we worked out a budget with her. She wanted to make sure we could maintain our lifestyle more or less, rather than put us on instant noodles."

Day-Reiner a 36-year-old office manager and McVittie, a 32-year-old software developer, know they need to make some short-term sacrifices — like moving to a cheaper apartment outside of downtown — if they’re going to build enough for a down payment in just two years.

The other important part of their savings plan is finding the best place to park their money in this era of volatile stock markets and low interest rates.

Experts say first-time home buyers need to invest so their savings will grow, but avoid risks associated with stocks. Safe, short-term investments that will allow them to take out their cash when they need it are the order of the day.

Day-Reiner and McVittie face an extremely hot Toronto market in which the average home cost $568,768 in May.

That means to reach a down payment of 20 per cent — the minimum amount required to avoid mortgage insurance — they need a whopping $113,754. A five per cent minimum down payment on the average Toronto house would be a more manageable $28,438.

Toronto may be one of the country’s most expensive real estate markets, but prices across the country remain high —at an average of $375,810 in April.

And those sky high prices — along with delayed salaries due to years of school, piles of debt, and an uncertain job picture — are making it tough for a generation of first-time home buyers across the country.

While you can put down as little as a five per cent, experts suggest it usually makes better sense to wait and invest your money in safe fixed-income options that will guarantee you’ll at least have as much as you initially invested when you find that perfect house.

"What you have to do is keep it simple," says Adrian Mastracci, president of financial advisory firm KCM Wealth Management Inc.

For those eager to purchase a home, he says, the shorter the investment commitment the better — that means not being locked into unpredictable investments like stocks, or less risky, but term-driven investments like long-term GICs or 10-year bonds.

The more exposure you have to the stock market, even through mutual funds or ETFs, the greater chance you’re taking that you could lose money and have to wait longer to own a home.

Aurele Courcelles, director of tax and estate planning at Investors Group, the firm that helped Day-Reiner and McVittie formulate their plan, says matching your investments to your time horizon is important, but so is choosing the right investment.

Ideally, he says, potential homebuyers should use a combination of Registered Retirement Savings Plans and Tax Free Savings Accounts, with a focus on RRSPs because of the benefits offered under the first-time Home Buyers Plan.

The plan allows a person to withdraw up to $25,000 from an RRSP to buy a home with no tax penalty. You generally have to repay the withdrawal within 15 years, but allows investors to reap the tax-deductible benefits of investing in an RRSP, as well as save for a home.

An added bonus of investing through the RRSP is the tax refund you’ll get come tax time every year, which you can reinvest in either that plan, a TFSA or use to pay down debt.

Investments in a TFSA can be withdrawn tax-free at any time and are a helpful supplement that can be used to pay for the extra charges involved in a home purchase from insurance, to property taxes to legal fees.

Experts can’t accurately predict whether home prices will move higher or lower in the next few years, as there are so many variables involved. Instead, buyers should focus on when the time is right for them, they say.

Day-Reiner and McVittie say they’re hoping the Toronto market will have cooled by the time they’re ready to buy, but for now they’re focused on making safe investments so they’ll have the cash available when they find their dream home.

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