Investment Strategies for First Time Home Buyers

For many Canadians the thought of home ownership is a pipedream, and their reality will not include what many generations have taken for granted.

Others see home ownership as an obtainable goal, but the priority now is to get a substantial down payment to get “in the game”.

For those that don’t have the luxury of using “the bank of mom & dad” here’s how they should prioritize their savings program.

First Home Savings Plans (FHSA)

Without doubt the best first step in creating a savings vehicle geared for a first-time home purchase.

  • Created in April 2023 the Liberal Government took a massive step in launching the program which has been very well received by Canadians.
  • Allows for an $8,000 per year (spouse/partner has same ability) tax deductible deposit up to a lifetime maximum of $40,000.
  • Growth occurs tax free as long as the proceeds are used to buy a home within 15 years.
  • Full range of investment options from conservative Daily Interest Account and GICs through to Mutual & Segregated Funds to individual stocks held in a DIY online account.

Tax Free Savings Account (TFSA)

The TFSA is the most flexible of all the savings programs because the money can be used for anything, whether that is geared for the downpayment or not.

  • $7,000 per year (spouse/partner has same ability) deposit to a lifetime maximum of $95,000 for those that were 18 in 2009 when the TFSA was first launched.
  • Growth is tax free and can be withdrawn at any time without tax consequences.
  • Similar investment options to the FHSA program, in that the risk/reward range can be from ultra conservative to aggressive.

RRSP Home Buyer’s Program (RRSP HBP)

Still used by many Canadians but has fallen further down the list of suitable options because the money withdrawn from an RRSP must be repaid at some point; in essence it is simply a temporary loan.

  • First time home buyers can withdraw up to $60,000 (spouse/partner has the same ability) to buy or build a qualifying home.
  • Repayments start 5 years after the withdrawal and are amortized over 15 years.
  • If a repayment is missed in one calendar year it becomes taxable.
  • The flaw in this program is that it is merely a loan and not a true downpayment like a FHSA & TFSA, thus the withdrawal has serious long-term implications on one’s retirement account. Yes, the equity in one’s home is also increasing but will future real estate gains equal future stock market gains?

Additional Tools – 30 Year Amortization on Mortgages

It’s been years since Canadian banks have allowed a 30-year amortization on home mortgages and the Government has just recently reintroduced this option for some borrowers who qualify.

  • A 30-year amortization schedule significantly reduces the monthly mortgage payment over a 25-year mortgage, allowing home buyer’s the ability to carry a larger mortgage.
  • However, there is a catch – In the first 5 years of a 30-year mortgage almost the full monthly payment goes towards interest, virtually nothing gets applied to the principal.
  • To help make a dent in the principal consider making weekly or biweekly payments rather than monthly. Also, when the original mortgage term (between 1-5 years) is up, consider shortening the amortization at renewal.

Work to Ensure a 20% Downpayment

Canada Mortgage & Housing (CMHC) demands that a traditional mortgage with less than a 20% downpayment carry risk insurance in the event of default.

  • High ratio debt mortgages carry a premium of up to 5% of the amount borrowed which adds tens of thousands of dollars on a 30-year amortization.
  • Monthly mortgage payments also increase because of this risk premium, but it all can be avoided if a 20% down payment is met.

Buy private Mortgage Life Insurance rather than the bank’s package

The bank will strongly recommend you purchase their product to ensure the mortgage is paid off in the event of an untimely death, but you have choices. An independent life insurance broker can find a better product and, in most cases, one for a lower premium than what the bank can offer.