Welcome to this month’s installment of Dear urbaneer, where we assist our clients with housing related questions that have been troubling them. This time around, we talk to a client who is considering the pros and cons of using RRSP funds as a down payment.
As we embark on our house hunt, we are pretty solid on where we want to live and what sort of property features are on our wish list. Now we are moving on to the “business” side of preparing for the house hunt-namely earmarking the funds for our down payment. We have some cash saved, but are considering dipping into our retirement funds (RRSP) to increase the down payment amount. What do you think we should do? Are we cutting ourselves short in our long term savings, just to get in today?
Down Payment Dilemma
Here's our response:
You’re touching on a very salient point that persists in today’s Toronto housing market. With the rapidly escalating house prices in Toronto, the reality is that many house hunters are looking to ways to stretch their house dollars, in order to keep pace and get in the market.
There are a few ways to increase your budget: take on more debt, which we’ve touched on in this recent Dear urbaneer called “Should I Max Out My House Hunting Budget With CMHC Insurance?” , or increasing the down payment (or in some cases, both).
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, which we cover in a number of posts like "Relying On The Bank Of Mom And Dad” and “Is The Bank Of Mom And Dad Behind Rising Housing Prices”) or look towards alternative savings vehicles - like retirement savings.
Dipping into your RRSP to buy a home is a little different than accessing some of your other investments, so there are items to consider before doing so. As we’ve said a number of times before housing (and financial) success rides heavily on due diligence to make well-researched decisions.
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).
Not repaying RRSP Home Buyer Plan withdrawals is not uncommon, as is outlined in this Financial Post article “Should You Withdraw From Your RRSP To Buy A House?”
As alluded to in this article, the growing number of people not repaying their RRSP Home Buyer Plan withdrawals is likely the reason that the government has held steady on the $25,000 withdrawal limit, even though some think that the limit should rise in tandem with rapidly rising property prices.
Overall Financial Plan
There are several schools of thought as to whether or not withdrawing from your RRSP is a wise move, and much of it depends on what your financial goals are, what your risk tolerance is, what your timeline is and what other kind of investments you hold (i.e. What is your asset mix? Are you all tied up in your house, or do you have other types of investments to fall back on?). As the proverb goes, you don’t want all of your eggs in one basket (investment or otherwise).
The truth is, diving into your RRSP may be a necessary step for first time home buyers to raise enough cash to get access to the swiftly moving and ever climbing Toronto property market. There is a sense that the window of affordability is shrinking, and if you count homeownership as a goal, you’ve got to pull out all of the stops to grant yourself passage.
If this describes your entry point and method to the market, despite the validity of this truth, it is never a good idea to over leverage yourself. Being house poor is not desirable from a financial and a lifestyle point of view. Being house poor and saddling yourself with an extra payment due to RRSP repayment obligations could means stretching yourself dangerously thin.
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, which we talk about in this recent post: “Dear urbaneer: Interest rates In The 1980s And Now”.
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 and the urbaneer team
earn you trust, then your business
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
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