RRSPs and Buying a Home

Using your RRSP’s for a down payment on your first home is common, and with the home buyers plan you can borrow money from your RRSP (Registered Retirement Savings Plan) account without the tax penalty usually associated with accessing the funds in your RRSP.  So does borrowing from your RRSP make sense?

Like so many financial choices it depends on what you want to accomplish and your unique situation.  Considering both the benefits and negatives of using this program is likely the best way to see if it makes sense for you.

The benefit is simple.

          –  if you have money in your RRSP’s it allows you to use this towards your down payment, without having to pay tax on the money withdrawn.

          – If you are in a high enough tax brackets, you can contribute to an RRSP and use the contribution as well as the tax return towards your new home, creating an even bigger down payment.

          – Larger down payment can save you CHMC insurance fees.

          – Larger down payment can reduce the monthly mortgage payment.

          – Larger down payment allows you to qualify for a more expensive place

So why would you not want to borrow from your RRSP?

          – When you borrow you do not get the growth in your investments you otherwise would.

          – You risk putting off the tax issue until a later time if you do not make the repayments, and the repayments will be due once you have a mortgage, making repayment harder.

          – You lose the diversification of investing in both your RRSP and I a home.

          – RRSP’s are creditor protected, your home is not.

          – Possible fees involved in taking the money out of the RRSP account.  These vary depending on how you invest and with whom.

          – RRSP’s are more liquid.  If something unexpected happens you can use the RRSP’s if need be, to get money out of the home you may need to remortgage or sell, both expensive options.

I often recommend clients use the Home buyers plan.  Many people pay CMHC fees as they don’t have a large enough down payment to get past these fees.  In many cases we use a contribution into an RRSP and or Spousal RRSP.  By including the tax refund and using money already saved for the down payment, this creates a much larger down payment.  Other times an existing RRSP is the down payment, allowing the purchase of a home to happen sooner.  This can save money that would have been wasted on rent or just make for a better lifestyle.

Home buyers plan is a great option, with many benefits, draw backs and restrictions.  When planning I believe that discussing your situation with a professional advisor or planner who you trust will help you make a quality and informed decision.  The details of the home buyers plan do change from time to time, so I would also recommend looking on the government of Canada website for current information before using this program.

With housing cost in Greater Vancouver as high as they are, often any detail that can help first time home buyers getting into the market can make a big difference.

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RRSP versus Paying down your Mortgage?

I believe that for most the answer is both.  In meeting with clients one of the most celebrated financial accomplishments for many is when they are finally debt free.  Saving outside of the mortgage in an RRSP offers diversification.  Too often if you save only in the home, it often means borrowing against the home or selling it to fund retirement.  If you choose both, paying down the mortgage and contributing to your RRSP you end up with a home and funds to draw from in retirement.

If you want a more math based answer it can be found in my previous post (TFSA Versus RRSP), paying down your mortgage for tax reasons can be compared to a TFSA, no tax benefit on the money in, no tax on the money out (usually), and no tax on the interest saved.

I believe the answer to this question lies in your ideal balance.  Some people need more money saved to be comfortable, others feel more comfortable with less debt.  The second consideration is how you spend.  If you buy a more expensive home every time you have a little equity, RRSP’s would likely provide a bigger retirement savings.  If you are likely to pay you home down quickly, and then stay there while building your savings then your balance may be towards paying down debt.  The third consideration is what would make you feel more successful, I find the more we do that makes us feel successful, the more success we tend to have.

RRSP’s have one other advantage; the courts have ruled that an RRSP can be creditor protected.  There are criteria that need to be met for this.  This can make a big difference if you ever find yourself in bankruptcy.

With current interest rates so low, I feel paying down debt is more important than ever.  If you choose to pay $500 a month into an RRSP, you will never be forced to increase this and could stop the RRSP payment if things change.  This contrasts a mortgage where every time your mortgage comes up for renewal, or with a variable ever time the rates change you risk a larger mortgage payment, and you cannot simple choose not to pay the mortgage in most circumstances.  Paying down your mortgage protects you if interest rates rise, or life requires you to lower your expenses.

Whichever you choose, saving money and building net worth will only make your financial life easier.  Saving with the wrong option is better than not saving at all.  The best way to choose which is right for you is through a conversation with a professional advisor.

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