By Jennifer Stewart – Toronto Star MoneyVille
My husband and I should have used our RRSPs as the down payment for our first home and because we didn’t I figure it could have cost us up to $40,500 over the long run.
I say, could have, because we sold the two-bedroom bungalow two years after we bought it and moved. But had we stayed there our mistake would have been huge over the life of a mortgage and it’s a good lesson for first-time home buyers.
We drained our savings accounts to come up with a $15,000 down payment for the new house, which was 5% of the price. What we should have done was take advantage of the federal government’s Home Buyer’s Plan (HBP), which would have allowed us to use our RRSPs for the down payment, increasing it to $60,000.
The Home Buyers Plan lets first-time buyers each use up to $25,000 of their RRSPs toward the purchase of a home, tax-free and interest free as long as it is repaid in 15 years. So, my husband I and had a maximum limit of $50,000 between us. We had $45,000 on hand.
Had we used it, we would have built more equity in our home, reduced our CMHC insurance premium, and potentially landed a better interest rate on our mortgage. Instead of paying interest to a bank, we would have been paying ourselves back interest-free.
The down side of using the RRSPs would have been losing the tax-sheltered growth potential. But since we were in our 20s, we would have had lots of time to repay the money and rebuild the portfolio. Balancing that loss was that presumably the value of the home would rise and our equity along with it.
It would have saved $5,250 in mortgage insurance that was added to the mortgage. The CMHC insurance premium when you just put 5% down is 2.75%. In our case, this meant $8,250. The premium drops to $3,000 (1%) with 20% down, which would have been the case if we used our RRSP.
Comment: As I point out time and again, you still have to pay CMHC fees with 20% down. It is not until 35.1% down that you escape paying a mortgage insurance premium. Don’t believe me? Check it out for yourself – http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm
For the two years that we lived in the house the savings would have been $6,840 plus the insurance premium of $5,250 for a total of $12,090, keeping in mind that my RRSPs would now be depleted.
What it might have cost based on a 25-year amortization and the difference between a $240,000 and $285,000 mortgage is $40,500. This assumes for arguments sake the same rate of interest.
The loss is mostly on paper loss but is a valuable lesson gained. As they say, live and learn.
————————————————————————————————————–
Contact the Jeffrey Team for more information - 416-388-1960
————————————————————————————————————–