Monday, January 30, 2012

HBP vs TFSA to buy your first Home

When it comes to scrounging up a down payment for a first home, many homebuyers take money where they can find it. If they've been socking away money in their RRSP for the last few years - and reaping the rewards of tax savings on the money - chances are there isn't a lot of money saved in other places. It seems logical, then, to take advantage of the government's Home Buyers' Plan and dip into those retirement savings, use them as a down payment, and repay the money over the next 15 years. After all, retirement is still most likely quite a ways away, right?

This article in the Financial Post questions whether it's really wise to sacrifice the growth of your retirement savings in favour of buying a home today.

It gives the example of a 30-year-old individual with RRSPs valued at $30,000, earning 8% per annum on average. If there were no HBP withdrawal, the RRSP would grow to $139,829 by age 50 and $301,880 by age 60. But take $20,000 out and repay it over 15 years and the RRSP would be worth $92,215 at age 50 and $199,805 at 60.
Instead, the article suggests taking advantage of a TFSA and drawing a down payment out of this newer investment vehicle. While there are definite pros to using a TFSA, in most cases the government's Home Buyers Plan is just the more logical option. Here's why:

1) Tax savings when you need them.
Let's face it - most people purchase their first home relatively early in their working life. When you're not earning a lot, you're not saving a lot either. Socking money away in an RRSP is great primarily because of the tax return you receive every spring - money you can either put back into your RRSP, or spend elsewhere. Either way, it's a great incentive - and great motivation to choose the RRSP over the TFSA.

2) You can only save so much.
To go with the above point, early in your career, there's only so much money to go around - and you can only save so much. While the article suggests using $20,000 from a TFSA and combining it with $25,000 in the HBP to put towards a new home, realistically most people just don't have this type of cash.

3) Retirement is still a ways off.
While you will lose some of the advantages of compound interest by dipping into your retirement savings, there is nothing stopping you from increasing your RRSP contributions down the road to make up for the loss. You also aren't obligated to take the full 15 years to pay back the funds you borrowed under the HBP. The quicker you pay it back, the quicker you can start saving again.

4) A home is an investment, too.
Yes, dipping into your RRSP to purchase a home will cost you in accumulated growth. But by using that money to purchase a home, you're essentially diversifying your retirement nest egg. If your home is a good investment - that will either increase in value or, at the very least, keep its value over time - you're in a good place. Come retirement, you'll likely be mortgage free with a nice piece of equity on your hands.

Pulling your down payment from an RRSP versus a TFSA also has a lot to do with your personal financial situation. In many cases, a TFSA makes more sense. To find out what's right for you, give us a call and we'll be happy to help.

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