Question e-mailed in by Globe and Mail reader Sarah: “I’ve spent the first decade of my career in Canada’s Arctic. As a result, my partner and I have paid off our student loans, a small home/glorified trailer, our wedding, and maxed out our registered retirement savings plans and tax-free savings accounts. Given all this, I was wondering where to put my savings next. I don’t anticipate being in the North for much longer and we are not having kids. Our next goal is saving for a down payment for a home in a big city. I don’t know what types of accounts exist outside of TFSAs and RRSPs and the last time I went to a bank to ask, I felt they were just trying to sell me things without really hearing me.”
Answer from Darryl Brown, an independent investment consultant and founder of You&Yours Financial in Toronto: You and your partner have done great work and achieved some serious finance goals. Your spidey sense at the bank was probably spot on – they were likely trying to sell you products. It’s important to remember that banks are businesses and when you go there looking for answers, you may not always get advice that is in your best interest.
My advice to you is don’t be intimidated. You have the right to ask for clarity on what is being recommended and specifically, find out whether there are any embedded fees or sales commissions on the products they are trying to sell you. While there are alternatives to the banks such as credit unions, your best bet for customized financial advice that is truly unbiased is an advice-only financial planner. Check out adviceonlyplanners.ca for a listing as well as profiles of several advice-only planners working in Canada (full disclosure – I’m one of them).
In terms of your next financial goal, buying a home in a larger city, saving for a down payment is an important step in this process. When you factor in the proceeds from the sale of your current home, be conservative. The real estate market fluctuates so you might not always be able to sell when you want, for how much you want. Lastly, don’t forget to factor in the costs for staging your home, selling commissions, legal fees and moving.
Before you set a down payment target, you need to decide how much home you can afford and ultimately, how much you can pay in monthly mortgage payments for the next few decades. Here’s where working with a planner is helpful. A good planner can provide a long-term detailed view of your finances that will make a big purchase a lot easier to wrap your head around. Remember that in addition to your mortgage, you will need to factor in things like car payments, trips, hobbies, elder parent care or early retirement. I work with too many folks that have been approved for mortgages that would leave them completely house poor. The Globe and Mail created this handy calculator to determine what you can afford, without compromising the life you want to lead.
So, what types of accounts exist outside of an RRSP or TFSA? For starters, your chequing or savings accounts. The benefit is convenience, since it’s likely you already have both set up. The downside is that you will not earn much, if any, interest on your cash. For a higher return on your savings turn to either a high-interest savings account or a non-registered investment account.
A high-interest savings account is available at your bank and the money you put there will earn you around 1 per cent at the large banks and about 2 per cent at online banks and credit unions. Compare that with your regular chequing or savings accounts, where you would earn under 1 per cent on deposits.
A non-registered investment account, which is likewise available at your financial institution, is a place where you can invest your cash in a wide range of assets, including guaranteed investment certificates (GICs), index funds, mutual funds and exchange-traded funds (ETFs). While you can earn higher rates of return with these investments, the return is not guaranteed and will fluctuate over time.
It’s important to note that with both these accounts, you will need to pay taxes on interest income, dividends or capital gains generated annually, unlike in a tax-deferred RRSP or tax-exempt TFSA.
When choosing the right type of account, timing is everything. When do you plan to make this move? How soon do you need the cash for your down payment? This timeline becomes your investment horizon and is a key factor in deciding how you should select an account.
If you’ve got more than three years before you need the cash, you can mix high interest savings with non-registered investments. As a rule, the longer your investment horizon, the more money you can invest – and vice-versa. Index funds, mutual funds and ETFs are what I recommend to clients looking for well balanced, low-fee options.
You should completely avoid investing any cash if you need to use it within the next three years. In that case, open a high-interest savings account and stick to a good budget by deleting UberEats from your phone.
I meet too many people who are tempted to try and invest their way to a higher down payment over a few months. Don’t do it. That strategy is simply too risky and unpredictable for such a large and important purchase.
Darryl Brown is an independent investment consultant and founder of You&Yours Financial in Toronto.
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