# Saving for 20% down-payment efficiently



## der.dev (Mar 7, 2013)

Hi,

I am a recent graduate. 

Here is my situation:
- no debt, no car payments, etc.
- make around 80k / year
- manage to save around 30k / year
- savings account: 30k
- RRSP: 0 (room 35k)
- TFSA: 0 (room 31k)

I am looking to buy a place to live in Montreal, from what I see it will be in the 400k range.

I want to have a 20% down-payment (80k) when I buy.

I also want to wait for about 1.5 - 2 years to see what happens to the real-estate in Quebec. I have a feeling the political situation will get worst in the medium-term, which might help me get a better price.

My plan is the following:
- put 25k in RRSP to be used with Home Buyers Plan (HBP) for down-payment
- save the rest in TFSA
- use the RRSP+TFSA to implement the 'Canadian Couch Potato' approach (

So in other words, for 1.5-2 years I want to save for down-payment, and then use the money to buy the home.

My question is simple: 
*Is this a sound plan, or there are some underwater rocks I am not aware of?*
(e.g. how difficult it might be to convert the RRSP+TFSA savings into a down-payment, etc.)

Thanks!


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## Ponderling (Mar 1, 2013)

Read the basic rules. RRSP HBP withdrawls must be reapd in next 15 years or you will get the bill with your tax return filings. Yes, you can take money from a TFSA any time. Money going back to a TFSA needs to be done in accordance with the rules after a withdrawl.

Most investment in the stock market opportunites - index or otherwise - offer a hope of a good chance of long term gains. The key word is LONG term.

Over a time line of two - three years the market can swing from manic to depressed and you might get caught on the wrong end of the swing.

I held retirement savings funds in varied mutal finds ( indexing was rare back then, and ETF's in their embryonic form as SPDR's ) from 98-2003 and the things sunk in value like the air being let out of a tire at different rates depending on the fund goals. Then valuation sat still more or less for a few years. I had the ability to sit tight. 04 was a good year for me returns wise. Had I needed to sell before that, the situation would be very different.

Re-think your desire to buy a condo, as time goes on and you horde away your nest egg. You may find that renting them might become much more affordable and then your nest egg can be deplyed for a longer term goal further down the road.


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## wendi1 (Oct 2, 2013)

25K in RRSP - check. It has to be in there for at least 90 days before you take it out for the HBP. This is not complicated, and is done all the time.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

31K in TFSA - check. You might need a couple of days notice, depending where you put it, but once again, this is done all the time.

The rest of your down payment (29K) will have to be in a non-registered account.

I would not use the couch potato approach for short-term savings - I would suggest a GIC, or a HISA instead, because of the risk that markets would be down when you need the money.

Montreal is a great city - I'm sure you will find something awesome.


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## Spudd (Oct 11, 2011)

Just check your TFSA limit - if you are young it might be <31K.

On all else I agree with wendi.


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## Canadian (Sep 19, 2013)

If you are adamant that you want to purchase in 1-2 years I would advise against the couch potato. I like wendi's recommendation RE: GIC, or HISA - or you can put it in a money market fund. I know, it doesn't sound like a thrilling approach, but your approach to short-term accumulation should be saving. Investing in the market over such a short time horizon can derail your plan.


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## Butters (Apr 20, 2012)

You might even want to stop RRSP at 24k, and hope for 1k growth

You don't HAVE to pay it back over 15 years, you will just pay extra in taxes
so if you can't make your 1600 dollar deposit, you will just be taxed an extra 500 dollars during income tax (these numbers are super rough)

both are easy to withdraw!

sounds like you have a great plan

in a year from now, you should also get in contact with a agent, and get your name put on the list to start viewing houses online, add them to your watch list and see how much they sell for
i physically walked through about 50 houses before i bought mine! and studied the market... i offered on 3 other houses, but they got extremely over bid, and i was not comfortable paying more for what they are worth, patience is key!


*edit and yes I agree with Canadian, better to be safe!!! HISA are EASY


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## peterk (May 16, 2010)

A recent graduate that is able to save 30k/year would be not too worried about paying back 25k to his RRSP over 15 years, I would think.

I'm also a new grad and saving for a house. I have around 25k in the stock market and 35k in cash. I'm only adding to my cash position from now on, and the 25k in the markets is making me feel uneasy. I suppose you could throw 5-20k into the markets to keep things interesting, so long as you are willing to lose a few thousand bucks perhaps.


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## der.dev (Mar 7, 2013)

Thank you everyone for the candid advice.

First a few quick additional notes:
- I am aware and OK with repaying back the 25k for HBP over 15 years
- the 35k RRSP and 31k TFSA rooms are confirmed (CRA)

I agree with the general tone of your replies, that given the time frame, it would be better to just accumulate the down-payment by saving and keep the money in HISA/GIC/money-market.

I've done some research on TFSA-HISA accounts and the rates seem to be in the 1.0-1.9% ballpark, with the notable exception of People's Trust TFSA (3.0%). The GIC rates seem to be in the same range or lower. I don't know much about the money market. Maybe someone has a good reference.

Assuming I want to follow the following partition:
- 25k RRSP
- 31k TFSA
- 24k non-tax-sheltered savings account

*Are the following steps all I need, or something's missing?*
- open RRSP HISA account, deposit 25k over time
- open TFSA HISA account, deposit 31k over time
- open regular HISA account, deposit 24k over time
- few days before down-payment is needed make sure funds are available in all accounts

And a final question, *why would I not put my savings with People's Trust?* I am aware they had some cyber-security problems back last year. The deposits seem to be FDIC insured, and they seem to have added online banking which many people requested for the longest time.


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## Synmag (Apr 16, 2011)

That looks to be a sound commonly accepted strategy. 

I am going to throw out there an advice I got a long time ago which is "instead of depositing money into a bank, own the bank". 

When the bank takes your money, pays you peanuts, then turns around and reinvests it or charge you 20% on credit card interest you can participate by buying the banks. It's not generally recommended to invest in the stock market with less than a 3 year time horizon, however the Canadian banks are not extremely volatile and they happen to be down recently by about 10% (buying low is a good thing) due to the emerging market currency issues. Your upside normally is about mid to high single digit return on a bank plus about 4% dividend for a total of around 10%. You could invest say 25% in a bank(s) and if there is further weakness take some form an HISA and buy more, perhaps another 25%. If you look at the price chart of one of the big five banks on google/yahoo finance for the last 20 years you will see that the banks tend to recover from any weakness in a year or two.

Food for thought.


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## none (Jan 15, 2013)

I strongly disagree with the notion that your cash should be in a GIC or something like that. A thing that people fail to realize is that these 'safe' investments are for when it is absolutely critical to have all the principle at a end date and the consequences of not having all the principle is extreme (i.e retirement for RRSP, starting school for RESPs). 

Do you ABSOLUTELY need to buy a house after 2 years or would you be willing to put a bit of uncertainty around that date (i.e 1.7 - 2.5 years for example). 

That's all that moving money into risker products does - put a larger uncertainty around the end dollar amount. It might be bigger it might be smaller, it may be just the same. I wish someone (maybe I should do this) should make a distribution calculator for investments based on equity exposure over a defined time period. I think people would find it extremely useful. It would actually be pretty easy to code up.....

If you're OK with a bit of uncertainty, and with making 80K a year you should be, then throw it in a couch potato. That's what I would do at least.


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## Four Pillars (Apr 5, 2009)

none said:


> If you're OK with a bit of uncertainty, and with making 80K a year you should be, then throw it in a couch potato. That's what I would do at least.


This is very bad advice.

A couch potato with any significant equity portion is not a 'bit of uncertainty'. It's a lot of uncertainty. 

Look how much the equity markets dropped in 2008. If someone had started a house fund in the beginning of 2007 with the idea of buying at the beginning of 2009, they would have been pretty pissed if they had put even 10% into equities during that time.

It's not about maximizing the return, it's about making sure the money is there when you need it.


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## Echo (Apr 1, 2011)

Four Pillars said:


> It's not about maximizing the return, it's about making sure the money is there when you need it.


+1


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## none (Jan 15, 2013)

Four Pillars said:


> It's not about maximizing the return, it's about making sure the money is there when you need it.


I made that abundantly clear in my post. It's up to the OP to decide on his NEED to buy in 2 years or not. If he wants to sit on dead money he can but if he wants to include some risk (maybe even a 90 bond/10 equity potato) that's up to him to decide. I'll let him decide if he's willing to potentially wait another two years to buy a house if something really bad happens... or buy a better house for taking on some risk. 

It just adds uncertainly around the buy date - don't be so melodramatic. I understand that it can be hard for people to think in terms of probability distributions but that's what needs to be done here.

Edit: hey cool, it already exists -- check this out: http://www.ndir.com/cgi-bin/downside_adv.cgi


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## Four Pillars (Apr 5, 2009)

none said:


> I made that abundantly clear in my post. It's up to the OP to decide on his NEED to buy in 2 years or not. If he wants to sit on dead money he can but if he wants to include some risk (maybe even a 90 bond/10 equity potato) that's up to him to decide. I'll let him decide if he's willing to potentially wait another two years to buy a house if something really bad happens... or buy a better house for taking on some risk.
> 
> It just adds uncertainly around the buy date - don't be so melodramatic. I understand that it can be hard for people to think in terms of probability distributions but that's what needs to be done here.


Yes, I understand what you wrote. You are suggesting that he might be better off with a higher risk portfolio and then just delay the house purchase if the returns aren't there.

I really don't understand why someone would do that - he specifically mentioned 1.5 to 2.5 years which seems pretty clear. I also don't think it's that likely that someone would want to make plans to buy a house in a certain time frame, save up etc and then be willing to delay the purchase for what could be a long time. And for what? A higher potential return on the down payment? 

I'll accept that it is an alternative option, but I also think it doesn't make much sense.


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## none (Jan 15, 2013)

Well we can agree to disagree then.

He already said that he doesn't have a hard deadline to buy so if he's flexible on the buy date (and he should be with how the MTL market is anyway) then this is a viable (and I would say preferential) strategy. 

I don't know why you would advocate a strategy guaranteed to lose the OP money but people have different investment strategies. Reminds me of the fixed-rate vs variable rate mortgage debate. Fixed rate you are guaranteed to pay more than variable but with variable there is a small probability you may pay more than fixed. We all know that only one who went fixed over the last decade were suckers.


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## Four Pillars (Apr 5, 2009)

none said:


> I don't know why you would advocate a strategy guaranteed to lose the OP money


?? You're talking nonsense now.

Anyway, his downpayment investing strategy is almost irrelevant compared to the perils of buying when you are a young, recent grad. I think he should wait a few years and just keep saving.


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## none (Jan 15, 2013)

Four Pillars said:


> ?? You're talking nonsense now.


Pro-tip: Opportunity cost is a real thing.

http://en.wikipedia.org/wiki/Opportunity_cost


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## Charlie (May 20, 2011)

with a two year timeframe and accumulating $80K over that period, the rate of return is almost irrelevant. Maybe he gets that $80K to $90K on a 10% return? Is this worth the risk of being under $80K when he needs it? (esp given that $80K puts him at the all important 20% down payment).

FWIW -- I'd probably go with equity...but that's my risk profile. Not good advice for someone else who has articulated different goals.


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## none (Jan 15, 2013)

If you are going to downplay the gains over that time frame as irrelevant then you need to downplay the risk of loss as irrelevant as well - you can't have it both ways.

The worst a 40% bond couch potato did in a year is about -16% over the last 40 years - which recovered within a year or two so the risk is far less than is being implied here. Plus the best 1 year return was 35%.

You can't focus on the worst case scenario and discount the best case. That is for the OP to decide on his risk tolerance. He could put in the 80 over 2 years and make 40% - you don't know -0 that's probably as likely as him losing 40% as well (actually I would say based on historical data there is a much greater probability of him making 40% than him losing 40 % - however both scenarios are highly improbable).

http://www.ndir.com/cgi-bin/downside_adv.cgi


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## Synmag (Apr 16, 2011)

The OP should also consider buying now instead of waiting for two years especially if he/she is paying more than 10k/year in rent. In that case he could use some of the rent money for mortgage insurance AND buy at today's prices. He/she would be enjoying the new home sooner and probably buy cheaper as in two years even if real estate increased at the rate of inflation say at 2.5% in two years he would have saved $20k on a 400k house. That alone pays for mortgage insurance with 5% down even if he is living at home with no rent. If he/she is renting that's another $20-30k savings. 

This eliminates the investment problem.


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## none (Jan 15, 2013)

In reference to the above post:


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