Garry Marr – Financial Post
Do you really want to raid your retirement fund to buy your first home?
Nobody sets out to do it, but given the price of Canadian homes, some consumers almost have no choice but to take advantage of the federal government’s Home Buyers’ Plan. You can withdraw up to $25,000 from your RRSP to buy your first home, as long as you pay it back over 15 years. Considering the average home in Canada sold for $363,346 last year, two people with $25,000 each could use that money to get closer to the goal of having a 20% down payment — an important demarcation point because it means you can avoid expensive mortgage-default insurance.
But tax-free savings accounts are now in their fourth year, meaning each individual could have up to $20,000 in that account. The TFSA is becoming a real alternative when it comes to saving for a home.
So which should you use to buy your house?
“There is a huge premium if you sit down and do the numbers for taking it out from the point of view of missed opportunity in terms of growth,” Al Nagy, an Edmonton-based certified financial planner with Investors Group Financial Services, says of removing the cash. “Once you’ve taken it out, unlike a TFSA, that contribution room is not put back. You lose that contribution unless you create new contribution room in terms of new income.”
The loss in terms of sheltered income growth can be harsh, says Mr. Nagy, who cites a 30-year-old individual with RRSP valued at $30,000, earning 8% per annum on average. If there were no HBP withdrawal, the RRSP would grow to $139,829 by age 50 and $301,880 by age 60.
But take $20,000 out and repay it over 15 years and the RRSP would be worth $92,215 at age 50 and $199,805 at 60. Pay the $20,000 back over 10 years and the RRSP would be worth $100,237 at 50 and $216,404 at 60.
“The loss of RRSP growth by using the HBP would be mitigated by the savings in the mortgage interest expenses by reducing the size of the mortgage through the use of the HBP withdrawal,” he notes, adding people need to remember HBP repayment is a non-deductible expense.
“I don’t think we should forget the reason for the RRSP is to save for retirement.”
Don Lawby, chief executive of Century 21 Canada, still sees a strong need for the HBP and says it has yet to be replaced by the TFSA. “I think it still has some value. There is still a lot of confusion out there about the TFSA,” says Mr. Lawby, adding RRSPs remain more attractive to consumers. “People have a tough time saving for a down payment and it assists them to do that because those dollars are before tax.”
He adds there is a third alternative for those interested in buying a house. There is nothing to say you couldn’t use both accounts for a down payment. That could mean $90,000 for a couple and based on today’s home prices you might need that much cash to get to a 20% downpayment.
———————————————————————————————————————
Contact the Jeffrey Team for more information – 416-388-1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
———————————————————————————————————————