On one hand, I do miss having a bit more space; on the other hand...
September 19, 2014 5:51 AM Subscribe
Which makes more sense: pension fund contribution or large down payment on a house?
We've sold our old house back in Quebec (hooray!), and while we're currently renting, are thinking about getting back into home ownership if we find the right place, for the right price. But my husband also has the ability to sink a load of money into his RRSP (Canada's version of a 401k). Generally speaking, is it more fiscally prudent to maximize down payment on a home, reducing the total interest paid over the life of the mortgage, or to "fill" the RRSP for the immediate tax break and long-term investment interest? We have about $100K from the home sale; the homes we're looking at are in the $250-300K range. The RRSP contribution could be as high as about $35K.
We're not in a huge hurry to buy the house, so if there's a different, even better plan (we could put it in a 6-month GIC at 1.25%, for instance), we'd be open to hearing it.
Note: we are looking into acquiring a financial planner and an accountant here in our new town.
We've sold our old house back in Quebec (hooray!), and while we're currently renting, are thinking about getting back into home ownership if we find the right place, for the right price. But my husband also has the ability to sink a load of money into his RRSP (Canada's version of a 401k). Generally speaking, is it more fiscally prudent to maximize down payment on a home, reducing the total interest paid over the life of the mortgage, or to "fill" the RRSP for the immediate tax break and long-term investment interest? We have about $100K from the home sale; the homes we're looking at are in the $250-300K range. The RRSP contribution could be as high as about $35K.
We're not in a huge hurry to buy the house, so if there's a different, even better plan (we could put it in a 6-month GIC at 1.25%, for instance), we'd be open to hearing it.
Note: we are looking into acquiring a financial planner and an accountant here in our new town.
One place to start to think about this is to compare the interest rates you might pay on the mortgage with the expected returns on whatever funds the retirement account might provide.
posted by aught at 6:00 AM on September 19, 2014 [3 favorites]
posted by aught at 6:00 AM on September 19, 2014 [3 favorites]
I'd think of it as a cash flow problem -- will the downpayment make your monthly payment NOW less? And will that added flexibility in your budget be helpful? Or will the retirement money later (say $X per month after 65) be more helpful? If there's not a significant difference there, then look at the interest/returns.
posted by typecloud at 6:06 AM on September 19, 2014 [1 favorite]
posted by typecloud at 6:06 AM on September 19, 2014 [1 favorite]
Another option is to put some of it in the RRSP, and use the resulting tax refund to add to your house fund.
Though I would recommend keeping 20% of your expected house purchase price in cash (or a very liquid investment). That way you won't need to get CMHC insurance on any future home, which will save you money down the line.
posted by barnoley at 6:06 AM on September 19, 2014 [1 favorite]
Though I would recommend keeping 20% of your expected house purchase price in cash (or a very liquid investment). That way you won't need to get CMHC insurance on any future home, which will save you money down the line.
posted by barnoley at 6:06 AM on September 19, 2014 [1 favorite]
There's really no one size fits all answer to this question. It depends on so many variables, including when and how you'd like to retire, how fast home prices are going up in your area, and your cash flow.
Typically with excess cash you would want to 0) pay off any high-interest debt, 1) make sure your TFSA is totally maxed out, 2) Max out your RRSP, 3) put your money into a high-interest savings account (you should be able to find more than 1.25%) and then go on the house hunt. You do have a high down payment for your budget so you should be okay putting down 30% less or so on a house, especially with mortgage rates as low as they are. Also keep in mind that you want to avoid CMHC insurance if at all possible, it adds significantly to your costs.
posted by sid at 6:17 AM on September 19, 2014
Typically with excess cash you would want to 0) pay off any high-interest debt, 1) make sure your TFSA is totally maxed out, 2) Max out your RRSP, 3) put your money into a high-interest savings account (you should be able to find more than 1.25%) and then go on the house hunt. You do have a high down payment for your budget so you should be okay putting down 30% less or so on a house, especially with mortgage rates as low as they are. Also keep in mind that you want to avoid CMHC insurance if at all possible, it adds significantly to your costs.
posted by sid at 6:17 AM on September 19, 2014
1.25% is not a very high interest rate at all. Surely you could open a term deposit with a bank and get something closer to 4 or 5% if you're going to be investing so much.
posted by kinddieserzeit at 6:23 AM on September 19, 2014
posted by kinddieserzeit at 6:23 AM on September 19, 2014
How old is your husband? If he's around the same age as you then I can reasonably assume that neither of you is planning on retiring for at least another 20 years. Do you want to pay rent for the next 20-30 years? Did you enjoy owning a home? Do you enjoy remodeling, decorating, gardening, puttering? Do you plan to stay in the area for a long time? If you answered yes to most of these, buy a house.
posted by mareli at 6:32 AM on September 19, 2014
posted by mareli at 6:32 AM on September 19, 2014
Response by poster: Brief pop-in:
The housing market in our new city is stays pretty flat. Unless you acquire a job with 3 major employers in town (Queen's, KGH, RMC), there isn't much in the way of job growth. (That is not to say Kingston is impoverished, but being a city perfectly positioned from three major cities--Montreal, Ottawa, Toronto--not a lot of outside investment happens here. The current municipal government is looking to change that.)
I'm 37; he's 41. We're very prudent financially and have no debt, aside from the rent we now pay.
posted by Kitteh at 6:38 AM on September 19, 2014
The housing market in our new city is stays pretty flat. Unless you acquire a job with 3 major employers in town (Queen's, KGH, RMC), there isn't much in the way of job growth. (That is not to say Kingston is impoverished, but being a city perfectly positioned from three major cities--Montreal, Ottawa, Toronto--not a lot of outside investment happens here. The current municipal government is looking to change that.)
I'm 37; he's 41. We're very prudent financially and have no debt, aside from the rent we now pay.
posted by Kitteh at 6:38 AM on September 19, 2014
I think house. You seem to be on a financially responsible course already in regards to being debt free and having investments. You could die tomorrow. Time to invest a little in the "now" option, which is house.
posted by WeekendJen at 7:06 AM on September 19, 2014
posted by WeekendJen at 7:06 AM on September 19, 2014
When I was in this situation I paid down my mortgage, but wish in retrospect I had done retirement instead, since my mortgage was never more than 5% but my retirement money makes more like 8%.
Other considerations are
- Might you want the liquidity (assuming liquidity is an option)
- Are there tax considerations where you are? (e.g. I can drop to a lower tax bracket by contributing to my retirement fund). Just getting the tax back now is not necessarily an advantage if you will have to pay that tax at the same rate when you are retired.
- Will you enjoy the life flexibility you could gain by having a mortgage-free property sooner than you otherwise might?
- Might you save money in the future if you rented, by being free to move easily for career reasons?
Of course another option would be a proportionally smaller down payment on a larger house. Not what I'd do, but hey.
posted by emilyw at 7:12 AM on September 19, 2014 [5 favorites]
Other considerations are
- Might you want the liquidity (assuming liquidity is an option)
- Are there tax considerations where you are? (e.g. I can drop to a lower tax bracket by contributing to my retirement fund). Just getting the tax back now is not necessarily an advantage if you will have to pay that tax at the same rate when you are retired.
- Will you enjoy the life flexibility you could gain by having a mortgage-free property sooner than you otherwise might?
- Might you save money in the future if you rented, by being free to move easily for career reasons?
Of course another option would be a proportionally smaller down payment on a larger house. Not what I'd do, but hey.
posted by emilyw at 7:12 AM on September 19, 2014 [5 favorites]
One place to start to think about this is to compare the interest rates you might pay on the mortgage with the expected returns on whatever funds the retirement account might provide.
I'd think of it as a cash flow problem
I'd think of it as both of these. If the payment on any potential mortgage will be no sweat for you regardless of how much you put down, I'd plan on putting enough of a down payment to get the lowest mortgage rate (typically 20%) and hold back a little extra just in case, then compare that rate to the returns on the retirement account.
An additional angle to consider, the return on putting the whole thing into a house can be thought of as the combination of the interest that it will save you and any appreciation on the house. Even if that combined rate is similar to the returns on the retirement account, it's much harder to capitalize on that growth since you basically have to sell the house to do it. The retirement account is a little more liquid in that you can change the investments around within the account and, I assume, withdraw funds penalty free in some circumstances. Even if you have to pay an early withdrawal penalty it's still far more liquid than selling a house.
posted by VTX at 7:45 AM on September 19, 2014 [1 favorite]
I'd think of it as a cash flow problem
I'd think of it as both of these. If the payment on any potential mortgage will be no sweat for you regardless of how much you put down, I'd plan on putting enough of a down payment to get the lowest mortgage rate (typically 20%) and hold back a little extra just in case, then compare that rate to the returns on the retirement account.
An additional angle to consider, the return on putting the whole thing into a house can be thought of as the combination of the interest that it will save you and any appreciation on the house. Even if that combined rate is similar to the returns on the retirement account, it's much harder to capitalize on that growth since you basically have to sell the house to do it. The retirement account is a little more liquid in that you can change the investments around within the account and, I assume, withdraw funds penalty free in some circumstances. Even if you have to pay an early withdrawal penalty it's still far more liquid than selling a house.
posted by VTX at 7:45 AM on September 19, 2014 [1 favorite]
Another thing to think about is what percentage of your 100k is profit -- that is, did you make money on your previous house? I don't know much about Canadian law, but in the US, profits from selling a house are taxable as income unless you turn around and put them into another house, so it might be you'd save a lot (even now) by doing the bigger down-payment. Worth asking around.
posted by acm at 8:59 AM on September 19, 2014
posted by acm at 8:59 AM on September 19, 2014
Rent is money you're throwing away forever. If you buy, you at least have the possibility of a return.
So, you buy unless:
* You're certain your investment returns will defray the rent loss.
* It's not plausible that real estate values are increasing at a rate enough to defray the rent loss in a meaningful time frame.
* You're not planning to stay long (i.e. you can't amortize the additional costs that come with a purchase, such as home repair, property taxes, etc).
* You value your flexibility. You can break a lease. But you have to sell a house.
posted by Cool Papa Bell at 9:05 AM on September 19, 2014
So, you buy unless:
* You're certain your investment returns will defray the rent loss.
* It's not plausible that real estate values are increasing at a rate enough to defray the rent loss in a meaningful time frame.
* You're not planning to stay long (i.e. you can't amortize the additional costs that come with a purchase, such as home repair, property taxes, etc).
* You value your flexibility. You can break a lease. But you have to sell a house.
posted by Cool Papa Bell at 9:05 AM on September 19, 2014
Capital gains on your principal residence are untaxed in Canada.
Don't ignore the TFSA, which is the reverse of the RRSP (money goes in post-tax and comes out post-tax including investment income earned).
posted by jeather at 9:06 AM on September 19, 2014
Don't ignore the TFSA, which is the reverse of the RRSP (money goes in post-tax and comes out post-tax including investment income earned).
posted by jeather at 9:06 AM on September 19, 2014
Rent is money you're throwing away forever.
I hear this so often, and it's misleading by omission.
Mortgage interest is also money being "thrown away forever". Same with foregone interest on money that is tied up in home equity.
You're certain your investment returns will defray the rent loss.
Nobody can be certain about investment returns or home price returns. You're taking a risk either way.
posted by ripley_ at 11:46 AM on September 19, 2014
I hear this so often, and it's misleading by omission.
Mortgage interest is also money being "thrown away forever". Same with foregone interest on money that is tied up in home equity.
You're certain your investment returns will defray the rent loss.
Nobody can be certain about investment returns or home price returns. You're taking a risk either way.
posted by ripley_ at 11:46 AM on September 19, 2014
Heeey, Kingston! I've been eyeing the market here for a little while now too.
Not sure if this is really in your head, but given it's a 'renter's town', if you are at all near any of the schools, you can always take into account the possibility of renting part of your home to pay for the mortgage. That's just something that's simply not possible if you don't go into property ownership, but that's huge factor for us. (I work at Queen's, we want to live in walking distance, so it's key for us.) Whether it's a property with a basement/attic apartment; or one that we could rent out if we ended up moving elsewhere...that's what we still haven't figured out.
As for the actual question regarding RRSPs....I have no idea on that front.
posted by aggyface at 11:54 AM on September 19, 2014
Not sure if this is really in your head, but given it's a 'renter's town', if you are at all near any of the schools, you can always take into account the possibility of renting part of your home to pay for the mortgage. That's just something that's simply not possible if you don't go into property ownership, but that's huge factor for us. (I work at Queen's, we want to live in walking distance, so it's key for us.) Whether it's a property with a basement/attic apartment; or one that we could rent out if we ended up moving elsewhere...that's what we still haven't figured out.
As for the actual question regarding RRSPs....I have no idea on that front.
posted by aggyface at 11:54 AM on September 19, 2014
You might find this calculator, from the NYT, valuable as a starting place: Is It Better to Rent or Buy? It leads you through a variety of adjustable inputs, including mortgage details, housing market, maintenance & upgrades, to show you what return of investment, if any, you get buying a house versus continuing to rent.
posted by barchan at 12:05 PM on September 19, 2014
posted by barchan at 12:05 PM on September 19, 2014
You might find this calculator, from the NYT, valuable as a starting place.
Keep in mind that the NYT calculator assumes mortgage interest and property taxes are deductible which is not the case in Canada, so numbers will be skewed to the advantage of buying. You can adjust for this in the calculator by setting your marginal tax rate to zero, since marginal tax rate does not influence deductions or the cost of housing in Canada.
All other things equal, renting should be cheaper than buying in Canada since a landlord can deduct mortgage and property tax expenses but a homeowner cannot.
posted by JackFlash at 12:50 PM on September 19, 2014
Keep in mind that the NYT calculator assumes mortgage interest and property taxes are deductible which is not the case in Canada, so numbers will be skewed to the advantage of buying. You can adjust for this in the calculator by setting your marginal tax rate to zero, since marginal tax rate does not influence deductions or the cost of housing in Canada.
All other things equal, renting should be cheaper than buying in Canada since a landlord can deduct mortgage and property tax expenses but a homeowner cannot.
posted by JackFlash at 12:50 PM on September 19, 2014
Well, if you're going to throw money at a house, the best time to get a large infusion is right at the start. It is pretty much impossible to know which is the 'better' deal financially without specifics to compare the two, though.
If I was you, I would sink the entire amount into the house payment, then funnel the difference in your mortage payments into the retirement account automatically every month, since I'm fairly confident that your interest on a house is going to be greater than what any savings account would get you.
posted by Trifling at 8:42 PM on September 19, 2014
If I was you, I would sink the entire amount into the house payment, then funnel the difference in your mortage payments into the retirement account automatically every month, since I'm fairly confident that your interest on a house is going to be greater than what any savings account would get you.
posted by Trifling at 8:42 PM on September 19, 2014
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posted by quaking fajita at 5:58 AM on September 19, 2014 [1 favorite]