Buying a home signals adulthood to many, you feel like you’ve made it… you’re a homeowner. While the excitement of buying a home can feel like you’re on top of the world, it can be difficult to get to that point. Specifically, with the prices of homes increasing at alarming rates, and wages staying stagnant, scraping together enough of a down payment can be incredibly challenging.
Millennials are at the age where they have graduated, started working full-time, and, in many situations, would like to purchase a home to start a family. With the average home price above $400,000 in many of Canada’s major cities to even put 5% down means you need $20,000 available in cash plus all the additional costs that are required such as legal fees, land transfer tax, and title insurance.
Most experts recommend putting down more than 5%, especially since CMHC will apply until you have 20% down. You’ll find if you only put 5% down, by the time you actually pay CMHC you will barely own 2% of your actual home.* This is incredibly risky if the market value of your home were to drop by a couple thousand dollars, you’ll easily find yourself underwater on your home.
It’s important to have a strong down payment when purchasing a home, ideally at least 10%. This is just enough to decrease the amount of CMHC you will pay while still maintaining a large portion of your equity. Of course, if you can put more down and hit that 20%, threshold where CMHC is no longer applicable, that is ideal.
Saving tens of thousands of dollars, maybe even hundreds of thousands can seem like a daunting task for many, but it’s important to break up this savings goal into bite-sized pieces. The first step is determining where your down payment should come from. If you’re contemplating between your RRSP and your TFSA, I’d argue the RRSP is the way to go.
With the RRSP, if you are a first-time home buyer you will have access to the Home Buyers’ Plan (HBP) which allows you to withdraw up to $35,000 from your RRSP1 without any tax implications. You have 15 years to repay this amount back into an RRSP account; it doesn’t have to be the account you withdrew the money from. To utilize the home buyers’ plan you need to fill out the 1036 form, provided by CRA, and send it to your financial institution for processing. With some institutions there will be a nominal fee to withdraw the funds, so it is important to check this prior to making the withdrawal. The RRSP is preferable to the TFSA for withdrawal because the account allows you to defer tax into the future as opposed to earning income tax free as you would in the TFSA. This makes the TFSA very lucrative if you are investing your funds and shielding the growth from the tax man. Since you will ultimately be taxed on the amounts you withdraw from the RRSP in retirement it makes more sense to allow the power of compound interest to accrue in the TFSA versus the RRSP.
Coming up with a down payment is a large task and leveraging some of the money you’ve been able to sock away can help you reduce the amount of CMHC you will pay. The government has set up the HBP to help new home owners get into the market by having access to some of their savings in a tax deferred manner. Utilizing this program allows young people to put more down on their home, minimizing the CMHC they will pay.
1 – These amounts must be in the RRSP for at least 90 days
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About the Author
Janine Rogan is a personal finance educator and CPA based in Calgary Alberta. She is passionate about sharing her financial knowledge with Canadians to help educate them to make money-smart decisions. Through her website, Youtube channel, and community engagement Janine shares solid financial advice that will make a difference in how you manage your money. Check out JanineRogan.com for more details.