Oh god. Another RRSP post.

January 24, 2012 8:35 AM

Canadian RRSP filter: Does the Home Buyers Plan actually make sense? Can you crunch the numbers on my behalf?

So, Mr. Rattery and I are finally employed and starting to think adult thoughts. In the next two years we would like to buy a house. We would need to save $80,000 (at least) in order to make that happen in our market. Let's say that at this point we have $35,000 saved.

We have largely (but not entirely) neglected our RRSPs because a) we were underemployed for our 20s; b) we didn't need the tax savings; c) we are uncreative in our miserliness. Anyway, I want to make more money on our savings to speed up the process of home buying. At the same time, I want to set up actual retirement savings. I have been thinking of getting a mutual fund RRSP. What I don't know is whether I should dump a lot of money into it now (I can contribute up to $18,000 this year), or if I should deposit a small lump sum to start and set up modest monthly deposits.

This leads me to the Home Buyers Plan. On the one hand, it would seem wise to dump as much as I can into this RRSP, then take it out a year or two from now to use for the down payment.

On the other hand, though, I can't help wondering what effect this would have on my long-term retirement savings. Won't I be losing a lot of compound interest over the 15 years I'm slowly paying that money back to the fund? Frankly, my retirement savings are more important to me than the house (even though my retirement savings can't provide me space for a sewing room). Will the "investment" that our house represents off-set these losses? Does it make more sense to dump money into a non-registered investment?

Confused. I haz it.

I've tried to get a straight answer from the several financial institutions I've called, but they're all really gung-ho on the HBP. I just want an honest assessment of the costs/benefits in this particular financial climate.

Any advice is most welcome.

**Note that I've oversimplified the savings goals. I've gone through all the calculators around and have determined that we could theoretically carry the mortgage for a house about $100,000 more expensive than we would ever buy. We wouldn't throw all of our savings into our down payment and we know that we will need to save more than just the $80,000 to buy the house. Contingency plans, etc. We are wildly conservative when it comes to spending money.

posted by Mrs. Rattery to work & money (12 answers total)

We can't help you without knowing what marginal tax rate each of you is at. We also need to know how much unused room you have and what you think your future earnings will be like.

For example, if you are at 40% and your partner is at 16.5%, it might make sense for you to do the contributions through your individual RRSP and a spousal one for your partner. Then you get back 40%.

Yes, if you are paying money back into the fund, that money isn't getting compound interest or a chance to grow. But the thing is - this was money you put in for the specific purpose of buying a house. You're not robbing your RRSP. You put it in to get the 40% back, for example. And then you took it out to put on a downpayment. So now you're saving the 3-4% compound interest on your mortgage. AND you got back 40% on the money when you put it in as an RRSP. If it was 40% on $85,000, then you managed to come up with another $34k to pay down the mortgage OR contribution to your RRSP (and get that 40% and so on).

If you are putting money in to use for the HBP, don't put it in a fund. Use a GIC or other secure investment. You don't want to lose what you're saving for a home.
posted by Chaussette and the Pussy Cats at 9:07 AM on January 24, 2012

I used the HBP when I bought my first place in 2001. When I did it, I could only take out a maximum of $20K, and then I got 15 years to pay it back. I think it was a good way to go for me.

Won't I be losing a lot of compound interest over the 15 years I'm slowly paying that money back to the fund?

That money will be invested in a house, which will appreciate, and it'll also save you money in because you'll be paying out less interest on your smaller mortgage for the next 15 years. Meanwhile, in this economy, your RRSPs aren't all that likely to grow by a lot. My Toronto house has increased greatly in value, while my RRSP is only a little above principal.

Speaking just from my one experience, I say definitely go for it.
posted by orange swan at 9:28 AM on January 24, 2012

Can't help with calulations but this is our final year of paying off our HBP loan (I was about your age when we bought).

It's not something that has factored majorly in our finances. Over the last 15 years, stock market crashes, the Toronto housing market bubble and home renovation overruns have had a much bigger impact on than any HBP/RRSP investment differential.

No matter where the housing market goes, the more money you put down, the more you'll save on interest, and the safer you'll be in the event that rates rise. So I say, use your maximum BHP and as much of your other savings as you feel comfortable putting towards the downpayment.

You won't believe how fucking fast the time goes. It's not a huge, life changing amount of cash and it'll get lost in the noise.
posted by bonobothegreat at 9:52 AM on January 24, 2012 [1 favorite]

Hi,

Just to clarify, we would not purchase a home without having the 20% down payment in cash. It's just a question of whether that cash would be accumulated in an RRSP or another savings account, so I don't imagine this scheme would have much impact on our mortgage payments themselves (unless I'm being willfully obtuse).

Thanks, Chausette, for reminding me that I meant to ask whether a fund or GIC RRSP is better. The answer seems very obvious in hindsight.
posted by Mrs. Rattery at 10:04 AM on January 24, 2012

It's not something that has factored majorly in our finances.

This has been my experience too. The HBP is really a way for moving the tax-free benefits of the RRSP onto a portion of your mortgage. For me, it facilitated house buying earlier than later, but hasn't had a huge effect on my long-term planning.
posted by bonehead at 10:38 AM on January 24, 2012

I would recommend paying more than 20% if you can. Run a mortgage calculator and you'll see how much you save over the long haul for every bit extra that you put down now. I consider the mortgage interest saved as concrete money earned. GICs pay pretty poor interest. Also, having a bigger stake in the equity of your home helps if you ever need a loan or line of credit down the road.

Your repayment will essentially be a few thousand every year that you have to put back into your RRSP before you see any reduction in your taxable income. If possible, I'd save as much as I could outside of an RRSP, but if it's going help to put you into the house you want, go for it.
posted by bonobothegreat at 11:10 AM on January 24, 2012

Think of it this way. You put $85k into your RRSP. Let's say you get 20% back. That's $17k. You go to buy the house. You put down $102k. That's $17k+$85k. The extra $17k saves you, say, 3% a year for 25 years. That's another $35k you save on your mortgage interest.

Also, you get to use the mortgage to buy a home sooner, perhaps. Let's say you instead put $70k into your RRSP. You get $14k back at 20%. Let's say this means you can buy a home 1 year sooner. You are buying a home worth $450k. That home appreciates by 3% in that year. That's $13,500 tax free gain.

The catch is that you do have to pay the money back into your RRSP. But any one of the above should help offset that situation. You're basically fronting the tax savings and using it to buy a home. It's not that you're losing the 20% on the contributions over the next 15 years. You already got it.
posted by Chaussette and the Pussy Cats at 11:30 AM on January 24, 2012

The RRSP math has changed a lot now that TFSA's are available. RRSP's work best if you're in a high bracket now, and expect to be in a lower one when you retire. The more that this is the case, the more sense the RRSP makes.

For those in a low bracket, say, less than 35-40k in income, the TFSA makes more sense. RRSP (RRIF) income is treated as income for the purposes of the Guaranteed Income Supplement. Money taken from your TFSA is not. The GIS is clawed back when you reach a certain level of income in retirement.

RRSP lets you do some tax planning. If you have a really high income year, (bonus, some unexpected income,) contribute it to the RRSP to pull your taxable income down.

The funds need to be in your RRSP for 90 days before they can be taken out for HBP purposes. You need to make the HBP withdrawl within 30 days of the closing date of the property purchase. So you can make the contribution to the RRSP pretty soon before you buy the house. Take the deduction and tax refund, and it can help with those housing costs.
posted by thenormshow at 12:52 PM on January 24, 2012

thenormshow, is there any tax on money taken out of a TFSA?
posted by Chaussette and the Pussy Cats at 1:18 PM on January 24, 2012

Answering my own question...no tax on withdrawal. http://www.tfsa.gc.ca/tfsarrsp-eng.html
posted by Chaussette and the Pussy Cats at 1:26 PM on January 24, 2012

While Chausette is doing well in pointing out that you'll have extra cash from your tax refund to put towards your down payment, just don't forget you can only withdraw a maximum of $25,000 individually or $50,000 as a couple.
posted by waterandrock at 5:50 PM on January 24, 2012 [1 favorite]

Oh, right. I got around that by withdrawing $X in December and the rest in January, as I recall.
posted by Chaussette and the Pussy Cats at 6:21 PM on January 24, 2012