Welcome to August's Homewatch post. In this installment, we discuss the financial advantages and pitfalls of dipping into your RRSP for a home down payment, and other financial food for thought.
With the rapidly escalating house prices in Toronto, the reality is that many house hunters are looking for ways to stretch their house dollars, in order to keep pace and get in the market. In an effort to cool hot housing markets, like the one in Toronto, in February 2016 the Federal Government introduced new rules that require larger down payments by homebuyers. The CMHC now requires borrowers to put 10 per cent down on the portion of any mortgage it insures over $500,000, though the five per cent rule remains the same for the portion up to $500,000. In a city where the bounds of affordability are stretched for many, and housing prices are often well above the $500,000, this is the new reality for the majority of house hunters.
If you are trying to boost your down payment, you have a few options: put off the house hunt while you accumulate cash savings; gather financial support from outside sources, like your parents (which is a phenomenon quickly gathering steam in Toronto) or look towards alternative savings vehicles – like retirement savings.
There is sometimes a dilemma between spending and saving, and it may seem counter-intuitive to pull out your retirement savings long before retirement. However, if these savings are assisting you in rounding out your investment portfolio with real estate, or if this move is part of an overall long term investment strategy that includes home ownership, then your retirement savings are a very viable vehicle to help you achieve your real estate goals- both for today and for tomorrow.
The Fine Print
You may already be aware that you can use RRSP funds for a home down payment, but what do you know about all of the rules and regulations that surround that withdrawal and subsequent use? Some quick facts: You are allowed to withdraw up to $25,000 (that means $50,000 per couple) in a calendar year to use as part of the Home Buyer’s Plan. There are a few eligibility conditions though. You must be a first-time homebuyer and the property you want to buy or build must be eligible. The amount that you withdraw has to be on deposit for at least 90 days before you withdraw it again (no quick turnaround here).
Essentially, you get to withdraw these funds for the purpose of applying them to a home down payment tax-free. However, there is a kicker. You are required to repay the amount that you withdraw. Usually, you are required to start repayment two years after your house purchase, with full repayment required 15 years afterwards. Here is where there is some thought and financial planning that must come into play. After you’ve landed that coveted home, you’ll be taking on the extra expenses of home ownership. If you’ve withdrawn from your RRSP, you’ll also be tasked with replenishing the retirement savings that you’ve already accumulated – which could mean some additional sacrifices within your household budget.
What If I Don’t Pay?
There are financial consequences if you don’t follow the repayment schedule. Essentially, in a given year, the amount that you should have repaid will be lumped into your income, getting taxed at the full amount. While that may not seem like that big a deal, the costs can add up and seriously detract from your household’s bottom line and erode the total value of your investment (i.e. your house).
On The Other Hand…
The flip side to this is that if you’ve got your financial ducks in a row, cracking into that RRSP can be a shrewd investment strategy. Real estate is a good, solid investment as long as you are willing to engage a long term vision. Real estate values are variable and do fluctuate over time (even in a hot market like that in Toronto). That said, if you employ the asset-boosting real estate mantra of “location, location, location” (i.e. proximity to green space, amenities and public transport) property asset values will increase over time, generally speaking.
You could be using cash now for little nest egg to fund your future, employing a buy-and-hold strategy, much as past generations did decades ago. Also, if you are using your RRSP savings in order to avoid paying hefty CMHC premiums, the cost benefits can be substantial as well.
All in all, you’ve also got to consider your options in the context of your own financial picture and in the context of market conditions too. This underscores the necessity of understanding your options, and balancing your needs and wants today – and for tomorrow as well.
Do you need help formulating a plan for home ownership that looks far beyond property features (like into your future)? With several decades of experience navigating the Toronto housing market for the long term, as well as a multi-disciplinary education that allows us to deliver, comprehensive, valuable, relevant service, we’re here to help!
Steven Fudge & The Urbaneer Team
Bosley Real Estate Ltd., Brokerage
– we're here to earn your trust, then your business –
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