In our last blog, we looked at two different stories of people looking to use their investment earnings as part of their down payment. There are many different savings and investment vehicles to choose from, so we’ve put together a list of some of the most popular ones!
Disclaimer: I am not an investment specialist. Please seek investment guidance from an accredited investor and invest at your own risk.
Lower Risk Investments…
RRSP/RSP
A registered retirement savings plan, or retirement savings plan, is a type of financial account in Canada for holding savings and investment assets. Contributions to RRSPs are deductible from your total income which ultimately reduces the amount of income tax payable for the year. When it comes to RRSPs, there are some important things to keep in mind:
- You have until March 1st to invest a contribution that will count towards the prior year’s income tax (i.e. you still have time to make a contribution for the 2021 tax year)
- Contributions have the ability to generate yourself a tax refund or larger tax refund
- RRSPs have to be invested for 90 days before you can use them for a down payment (doing so now means you’ll be ready for the competitive spring and summer market)
- The max you can withdraw as part of the first time home buyer plan is $35K
- If you are purchasing (not for first time) due to a relationship breakdown or have been out of the home ownership market for over four years, you are eligible to use your RRSPs for down payment again (as long as they have been repaid from the previous withdrawal)
Pro-tip: You can withdraw your RRSPs to use for your down-payment AND closing costs on a purchase. Although you don’t have to use all of it for the purchase, you can use it for other costs such as furniture, decorating, landscaping, appliances, and paying down debt.
TFSA
A tax-free savings account is an account available in Canada that provides tax benefits for saving. Investment income, including capital gains and dividends, earned in a TFSA is not taxed in most cases, even when withdrawn. A TFSA is an easily accessible method of low-risk growth for your savings with the peace of mind that your money earned is not taxed.
ETF
An exchange traded fund is an investment fund that is composed of stocks, commodities, or bonds. ETFs trade on stock exchanges where their value is essentially the total value of the assets they contain. This means that the value of an exchange traded fund can change throughout the day. Although less risky than choosing specific stocks, the risk level of an ETF depends on the assets it contains. If it contains high-risk assets, then the risk level will be higher.
GIC
A guaranteed investment certificate is an investment that protects your invested capital. You will not lose money on the investment and they can have either a fixed or a variable interest rate.
Higher Risk Investments…
Crypto
Cryptocurrency or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority (e.g. a government or bank). Cryptocurrency is a trending investment that many people have made lots of investment gains on. It is highly volatile however and not accepted everywhere.
Crypto carries a slightly negative connotation with respect to the origin of the funds. In time, it may become more widely accepted but if this is a strategy you plan on using, you’ll need to prepare for significantly more paperwork. Make sure to trace all the money you’ve actually invested or cashed out months before you actually need the money. You’ll also want to ensure that you’re using legitimate trading platforms where all transactions are properly documented.
Stock
Stock consists of all of the shares into which ownership of a corporation or company is divided. A single share of stock is a unit of ownership in a company that is bought and sold on a stock exchange. Each share is the fractional ownership of the corporation in proportion to the total number of shares.
Stocks are also a more risk-inherent and volatile investment vehicle. In other words, you can earn and lose a lot more than the other lower-risk investments we discussed earlier. That said, investing in companies has a more positive connotation in the financial world than crypto does at the moment. Once again, as long as you can prove where the original investment came from, the gain on the sale, and show the funds are in your account, there should be no issues using them!
Everyone’s investment strategies are different. Contact the Kyle Miller Mortgage Agent team to have us review your investment situation and help you prepare for your mortgage application and down payment!
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