(Last Updated 2019)

A lot of people think it is their credit holding them back from getting a mortgage so they can buy their first home. Possibly, but credit is easy to fix. Truth of the matter is that saving for a down payment is the hard part. 

If you require more discipline as it relates to saving – perhaps you spend whatever's in your bank account and just squeak by to the next pay-cheque – then this article is for you!

Here's a Down Payment Savings strategy to help you

1. SAVE FOR DOWN PAYMENT,
2. BUILD YOUR CREDIT SCORE, and
3. GET THE GOVERNMENT TO HELP TOO.

The Steps are as Follows:
(Then I will give you the reason Why it Works, and Next Steps)

1. Open an RRSP saving account (not a TFSA) with a financial planner or an online bank like Tangerine.
2. Setup a monthly auto-payment from your chequing account to your RRSP account. Choose an amount that you can afford, but is a bit of a stretch, too. Your financial planner will help you.
3. If your credit needs a boost, get an RRSP loan, which is then used to buy a low-risk investment within the RRSP.  Setup monthly auto-repayment of the RRSP loan over 1 or 2 years directly from your pay-cheque bank account.
4. Sit back (chill-lax) and let the RRSP account automatically grow and your credit score build!
5. When you have enough saved for your home down payment, the money can be withdrawn without tax withholding as long as you qualify for the Federal Home Buyer's Plan on a first time home buyer mortgage in Canada.

Here’s why it works:

When you save in a Registered Retirement Savings Plan (RRSP), the government does not charge you income tax you on that money. As an example, if you have already paid tax from your pay-cheques and you save $10,000 in a RRSP over the course of a year, at tax time you might get an extra $3000 tax refund. Put this refund back into your RRSP, and - voilà - now you are at $13K for down payment savings, and you will generate a further refund at the next tax time!  See – the government is helping!

If you need to improve or build up your credit score, a loan that reports to the credit bureau and that you pay on time as agreed will definitely help improve your score. The good thing is that RRSP loans are easier to get simply because they are used to buy RRSP investments and the lender can easily cash in your investment if they don’t get paid back as agreed. So now you have “good debt” and regular payments reporting to your credit bureau. That's a good thing at mortgage pre-approval time!

The real magic happens when you set up automatic payments from your chequing account to your RRSP account (or to pay your RRSP loan). It works on the simple principle of “out of sight, out of mind!”  The key is to have the payments come out the same day your payroll deposit goes in. Chances are you won't even miss the money and you will feel great knowing that you are on the correct path toward the stability that homeownership offers to you and your family!

Next Steps

1. Determine your down payment savings target. As a starting point, use 6.5% of the price of a starter home in your area. (Example: $300K home requires $19,500 for down payment and closing costs.)
2. Meet with a financial planner and setup a RRSP savings program, and a time frame to reach this target. If you need a RRSP loan, the financial planner can hopefully arrange that, too.
3. If you feel the need to improve your credit score, click here.
4. If you prefer to save on your own, ask your employer if they have a RRSP savings program (perhaps they will match your contributions!) or try a Tangerine RRSP Savings Account, which is really easy to administer over the Internet. (Tip: I used to have a promo code 20376327S1 where they add $25 to your account - not sure if it still works)
5. Personally, I recommend using a financial planner, as it establishes a relationship that can last a lifetime as well as accountability to make your dreams a reality, and that's invaluable.

Good luck and keep in touch!  If you want to learn more on mortgage qualifying for first time home buyers, check out my Can I Get a Mortgage page.