Q. My wife, Rina, and I are in our late 20s and are saving up for a downpayment for a home. We have $120,000 in our account and are trying to reach $200,000 so we can make at minimum a 20% downpayment on a $1 million detached home in Toronto. My question is, how safe is our money in one account? Are small institutions like my credit union a risky place to keep over $100,000 in savings? And should we consider different account options for the savings?
A. Your money is safe. Each province has its own insurer tasked with protecting deposits inside provincially regulated credit unions.
In Ontario, savings inside provincially regulated credit unions are insured by the Deposit Insurance Corporation of Ontario up to $250,000. I would recommend that you confirm this with an employee at your credit union and ask for their pamphlet explaining your deposit coverage.
I have assumed your credit union is located in Ontario, but if it is located in a different province here is a listing below of all the provincial deposit insurers, from west to east. You will be able to check the different coverage amounts on their respective websites.
- Credit Union Deposit Insurance Corporation of B.C.
- Alberta Credit Union Deposit Guarantee Corporation
- Saskatchewan Credit Union Deposit Guarantee Corporation
- Deposit Guarantee Corporation of Manitoba
- Deposit Insurance Corporation of Ontario
- Autorité des marchés financiers (Québec)
- Credit Union Deposit Insurance Corporation (PEI)
- Nova Scotia Credit Union Deposit Insurance Corporation
- New Brunswick Credit Union Deposit Insurance Corporation
- Newfoundland and Labrador Credit Union Deposit Guarantee Corporation
Is it risky to hold your money in a small institution? The worst-case scenario is that the day before you close on your new home, the financial institution fails, as even though your money is insured, there will be a delay in getting your money back. I think that risk is very unlikely, but you will have to weigh it and decide for yourself.
You’ve asked for advice on the type of account you might use for your down-payment savings. There are three broad categories to consider: non-registered, TFSA* or RRSP. With a TFSA, you and your wife can each contribute up to $63,500, assuming you were both 18 in 2009. It likely makes sense to maximize your TFSA deposits, since saving within a TFSA is more tax-efficient than in a non-registered account.
Consider an RRSP* as well. You and Rina could deposit $35,000 each to an RRSP for a total of $70,000 if you each have RRSP contribution room from past years to do this. (Check your CRA notice of assessment to see how much you can contribute.) If your marginal tax rate is 40%, then by contributing the maximum you would receive a tax refund of $28,000, which you would use toward the down payment of your new home. This will get you to your 20% minimum down payment faster.
Having RRSPs will also allow you to take advantage of the first-time Home Buyers’ Plan (HBP)—meaning that you can withdraw up to $35,000 from your own RRSP, provided you pay back a minimum of one-fifteenth your withdrawal amount in each of the next 15 years. So for instance, a $35,000 RRSP homebuyers withdrawal means having to pay back $2,333 per year. If you decide not to pay it back in a particular year the, $2,333 “owing” is added to your other income that year and is taxed at your regular rate. (Note that RRSP money must be be deposited 90 days prior to withdrawal under the HBP.)
Why might you decide not to pay back the RRSP withdrawal? The numbers could make sense if one of you has a low-income year, or maybe one of you decides forgo work to stay home with your children. You can get financial or tax advice on this if the situation presents itself.
In terms of what to invest in while saving for a down payment, keep the money safe and accessible. That means no stocks, bonds or GICs* that aren’t cashable. Stocks and bonds fluctuate. You can’t cash most GICs—and what if you see your dream home tomorrow as you drive home from work? For this reason, you need accessible money.
I’m curious as to why you want to make a 20% down payment. Sure, if you buy a home that is worth $1 million or more, 20% is the required minimum down payment, and I understand that. But what if you find a home you like for less than $1 million and you have less than 20% to put down; would you buy it? Give it some thought. It may be worth your while to run the numbers for different scenarios with a fee-for-service advisor, who’ll want to look at the expected annual percentage increase in value on the type of Toronto home you are looking for. If it will it be more than the approximate 3.1% CMHC Mortgage Loan Insurance premium you would have to pay on the amount borrowed if you put less than 20% down, then you might be well-served to purchase your home with less than a 20% down payment.
I’ve given you a lot to think about, Marcus, but be assured that you and Rina are doing really well for a couple in their late 20s. Hopefully, you will be in your dream home soon!
Allan Norman is a certified financial planner and Chartered Investment manager in Barrie, Ont. Allan can be reached at firstname.lastname@example.org
This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning services through Atlantis Financial Inc.
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