The federal Home Buyers Plan let’s first-time buyers borrow from their Registered Retirement Savings Plan (RRSP) for a down payment on a new home. Is it a good idea? If you want to use your RRSP to help you buy your first house or condo, you can borrow up to $25,000 in any one year, with 15 years to pay it back. For some first-time homebuyers, this looks like a enticing offer, because you can borrow up to $50,000 for a down payment. The question is: Should you or shouldn’t you do this? The answer is, it depends, but even at the top of the housing market, it can make sense as long as you have a clear understanding of the risks.
Using some of your RRSP via the federal Home Buyers’ Plan reduces the size of your retirement savings, and so does the power of tax-free compounding. Your RRSP pot will be smaller and grow at a slower rate. Once you have a mortgage, chances are there’s less to spare for an annual RRSP contribution, in addition to the repayment of the sum borrowed. It also converts you from saver to spender. On the other hand, tapping into your RRSP provides a way to get into the housing market, something that many young people feel is an unobtainable goal. A house is an appreciating asset. If you can stay put for 7 to 10 years it will probably increase in value. It’s also a place to live and raise a family in and lets you pay yourself instead of a landlord.
In the GTA, where house prices have been predicted to fall in each of the past 10 years, they keep rising. The Toronto Real Estate Board say that the price of a home in the GTA has rose 7.5% in January, bringing the average sale price to $552,575. This means that first-time homebuyers waiting for the right time to buy a home have been disappointed. The latest interest rate cuts have added even more obstacles for first-time homebuyers who are just entering the real estate market, reducing a five-year fixed mortgage to 2.59%. The Royal Bank of Canada (RBC) is offering a ten-year fixed term mortgage for 3.84%.
Locking in for five or more years provides time to chip away at the principal amount, but the decision must be based on more than rates. It should be based on an assessment of your age and stage, your employment prospects and your life goals. If your planning to move our of the GTA in the future, now is probably not the best time to buy. If you’re planning to stay, waiting may not help you. There’s never a good time to buy your first house or condo. It’s always too expensive and it’s always stressful. You would end up house-rich and cash-poor. Your ally is time, which reduces the debt and increases your equity.
A survey conducted by the Canadian Association of Accredited Mortgage Professionals (CAAMP), found that half of first-time homebuyers are putting down 21% down on their first home and locking in for a five-year termed mortgage. If you’re relying on your RRSP for retirement security, then taking out money from it for your first home isn’t a good idea. It reduces the money you’ll have for retirement and, given the likely size of a mortgage, it pretty much ensures you can’t contribute much to it going forward.
The generation of first and second time homebuyers have higher priorities than saving for retirement and so housing makes sense if they carefully examine their situation. Even so, you’ll still need to find a way to save. By your mid-30s you need to start saving at least 5% of your pay and put it into your RRSP. This percentage should rise later on, as your earnings rise and other demands on your income will decline. The Bank of Canada is more worried about the effect of low oil prices on the economy then a housing bubble. This means that rates have been cut and will continue to be cut for a while. This shouldn’t be enough to affect your decision, and if you’re determined to purchase your first home be patient, there’s probably not much to be gained by waiting.
Source: Toronto Star
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