In 2014 I was living in Toronto in a one bedroom condo downtown. I had my first career job as a programmer, and I made enough money to afford rent for a 300-400 sqft one bedroom.
This place was so small I had to put my tv on a wheel cart in front of my bedroom door. It was one of those layouts that are all too common now, the kitchen as one row forming one of the walls in the living room. My bedroom door was to the left of the kitchen, and the balcony took up another wall.
After living there for 1 year I knew I wanted more – so I packed up all my belongings… and moved back in with my parents. A relatable story these days.
My plan was to save money to buy my own condo so I could start building equity. I made around $45000 / year at this point, but I was determined to find a way. My parents told me it was unrealistic, that I didn’t make enough money to buy my own place. But I knew there had to be something I could do.
This marks the beginning of my journey into personal finance. I read about all the different ways a Canadian can save money in the short term for a down payment and I found what I thought was the silver bullet.
The Home Buyers Plan
The home buyer’s plan is a tool provided by the Canadian government to help Canadians purchase their first home. It allows you to withdraw from your RRSP tax free to fund a down payment on your first home. The only catch is it has to be paid back over a 15 year period.
But I was only 25, I had no RRSP! How does this benefit me?
The best thing about the RRSP, is the refund you get back on your taxes when you fund it. Every dollar sent to the RRSP, deducts your taxable income. When you get the refund, you can then put it directly back into the RRSP, to generate another refund for next year!
So if your marginal tax rate is 40% for example, that means ever extra dollar you earn is taxed 40%. If you take that dollar and put it in your RRSP, you get 40% back. So if you put $10000 in your RRSP one year, you get back $10000 * 40% = $4000. Now you have an extra $4000 for your down payment.
Home Buyers Plan Negatives
The downside of using the home buyers plan is you have to pay back the RRSP you borrow within 15 years. I didn’t want to borrow something like 30 or 50 thousand from my RRSP just to have to start aggressively paying it back for years.
I wanted another option to build a bit of wealth. This is when I first seriously considered the TFSA.
Enter The First Home Savings Account
Of course, now we have the Canada First Home Savings Account (FHSA). The FHSA is even better than the HBP. It works similarly to the HBP, only there is no need to pay it back afterward into your RRSP. The FHSA is a standalone account, separate from the RRSP, with it’s own contribution limit which is set to be increased every year.
Naturally, you still have to be a first-time home buyer to use it. You can’t even open one or withdraw from one if you live with a common-law partner who owns a home. But as long as that isn’t your case it’s the best account available now for Canadian first time home buyers. You can read more about it on the CRA website.
The Tax-Free Savings Account
The FHSA was created after I purchased my first home, so instead I leveraged just the HBP and also necessarily, the TFSA.
Since turning 18, my TFSA contribution room had grown by about $5000 a year according to the CRA. I had more room in my TFSA than I could fill, so this was a great secondary investment vehicle for me.
The TFSA allows you to grow any contribution inside, tax-free, and withdraw from it tax-free. After learning this I decided I would put half of my down payment in my RRSP, and half in my TFSA.
Discount Banks
I needed a high interest savings account where I could actually hold and contribute to my RRSP and TFSA.
I first looked at TD bank where I do the rest of my banking, but the savings interest rates were so low that they wouldn’t be any benefit to me to build some extra wealth. I started looking at some other options and that’s when I found Tangerine Bank.
Tangerine had excellent savings rates at the time, as well as promos that would run for several months at a time. I got in with around a 3.5% 4 month promo which was quite good at the time since TD was something like 0.8%. After the promo the interest was still 2% which was great.
Combining these different strategies I was able to save up to $60,000 for my down payment in 2 years.
Preconstruction
During my saving timeline I was actively researching the real estate market to see what I could afford . My budget was 250 to $300K. Back in 2016 this was a reasonable price for a condo in Toronto, but even then still on the low side.
I wanted to get within biking distance to my workplace, as that was what I enjoyed before moving back in with my parents. I worked downtown, so I needed to be no further North than Bloor St. Checking various real estate listing sites, I was having some issues finding exactly what I wanted, so I started checking preconstructions as well.
Pre-construction deals allow you to reserve a unit of housing, to be constructed at a later date. You pay a deposit at first, followed by a payment schedule until you reach 20% down payment. The best thing about this was I could lock down my housing with only 5% down, and then continue to to pay the rest over time as I got it.
Finding a pre-con that would be ready within 2 years and still available was a stretch… but I found one! I got one of the last units in the building for $300,000, the very upper limit of my budget. It was small, around 500 sqft, and didn’t come with parking or even a locker, but both were promised to be available down the road.
New condo builds are coming out all the time and if you keep looking, you may even find one in your price range as a pre-construction. If you are looking for a pre-construction, you can either work with a realtor, or do a google search for pre-constructions and sign up for as many newsletters and pricing plans as you can because you never know what might be available.
The Purchase
Once the payment schedule was complete, I had transferred $60,000 to the condo builder, making up a 20% down payment for the $300,000 property.
As a first time home buyer, land transfer tax was waived so the only fee I had to pay was lawyer fees for drafting up the purchase agreements – approximately $2000.