Being A First Time Home BuyerBecoming a first time home buyer is easier than you might think. For most people--buying a home is the biggest and best investment they will ever make and until recently the down payment was surprisingly low, but the sub-prime mortgage debacle in the US, changed all that. Mortgage requirements are tightening up. This means it will be more important than ever to have a good down payment available when you are ready to become a first time home buyer. Rarely can a couple buying their first home get approved for a zero or very low down payment mortgage. Lenders will typically want to see a significant down payment and solid ability to carry the expense of home ownership. So down payments of $20,000, $30,000, even $50,000 are not unusual. Saving up this amount of money can seem pretty daunting for a young couple just starting out. But there is a great method any Canadian can use to save up a down payment for their first home-- Use an RRSP(Registered Retirement Savings Plan). In case you weren’t aware, the government allows each RRSP contributor to borrow up to $25,000 (tax-free) from their RRSP for the first time home buyer to purchase a home. This is very valuable opportunity, for there is no easier way to save up a down payment to buy a home. Here’s why:When you contribute to an RRSP you get a valuable tax deferral. In essence the government says “Oh you are going to save for your future? Well then –we will loan you the tax money we would have normally charged you—interest free!”So you put 300, 400, or 500 dollars in an RRSP account each month. At the end of the year the government calculates the tax you paid of those deposits and sends you a refund cheque. Here’s an example—You and your spouse each contribute $500 per month into an RRSP (total $1,000 monthly). After 1 year you have a total of $12,000. Remember the RRSP contribution is tax deductible. This means, if are in a 30% Marginal Tax Bracket you would receive a tax refund of $3,600. Take this money and put it into a TFSA (Tax-free Savings Account).At the end of the first year how much have saved towards you down payment? $12,000 plus $3,600 = $15,600! After 2 years you will have $31,200 After 3 years -- $46,800 If you were to do this $36,000 would be in in the RRSP and $10,800 in the TFSA $46,800 as a 20% down payment would allow you to purchase a home worth up to $234,000. Look at what you have saved vs. what it is worth – You saved $36,000 and it is worth $46,800 (because of the tax deferral).Remember you can each borrow up to $25,000 from an RRSP to buy a home. So you and your spouse each borrow the $18,000 from your RRSPs plus with the cash from the TFSA – come up with a $46,800 down payment and by your first home within 3 years. One of the cautions most advisors will bring up is the payback of the borrowed money. In this case –you would need to repay the loan over 15 years or at $1200 per year each. But what happens if you don’t pay the loan?The government will add $1,200 of taxable income to your yearly earnings. At a marginal tax rate of 30% you will owe an extra $30-in tax per month. Think about this--the cost of doing this will be about an extra $720 tax per year for 15 years. Is it worth it to own a home?The idea of becoming a first time home buyer can seem a little intimidating. Here is where you must decide, is saving a monthly amount in an RRSP for you and your significant other? It can be seem overwhelming, because it feels like a cost! Remember this money is simply payments you are already making on your new home!
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Terry Johnston J C Mitchell Financial Services Inc. Phone: 705-721-7781 Ext 232 866-721-7781 232 |
