Do you ever feel like you could spend your whole life saving money for a down payment?
When I first spoke with Tina and Jeremy early last year, they felt like they would never be able to save $25,000 for a 5% down payment on their $500,000 first home.
I explained that the federal government has a program for First Time Home Buyers, where they can each take $25,000 each out of their RRSP toward the purchase of home (it’s accurately called the First Time Home Buyers Plan). In addition, I explained that I also have banks ready to lend them money to put into their RRSP. The RRSP loans could be paid back over 10 years for about $275/month.
Since Tina and Jeremy were excited to get into their first house (things were getting stressful living with her parents) they completed the RRSP contribution before the March 1st RRSP deadline and also received almost $10,000 in tax refunds from Canada Revenue Agency that was used to cover closing costs (land transfer tax, lawyer fees, and movers) and also pay down some balances on credit cards.
Often clients and prospects reach out indicating that they don’t have a down payment and won’t be able to buy for years. Or more heartbreaking, is when clients run into real-life situations where the down payment they have been saving for years has been needed for a family emergency.
With this strategy you (like Tina and Jeremy) will only need 90 days, which is how long the money needs to be in your RRSP prior to being withdrawn for the down payment towards the purchase of a house. The down payment money you already have saved can be used to reduce your other debts, reduce the amount you will need through an RRSP loan, or give you some financial flexibility in your first years of home ownership.
As an example, if you have $100,000 in combined family income (including child tax benefits) and a decent credit score, this strategy can have you moved into your own $500,000 home within 4 months of our first conversation.
As an example, for a $500,000 house, your monthly mortgage payment would be $2,275/month and RRSP loan $275/month for a total monthly payment of $2,550 each month.
But here’s the bonus – since $1,150 of the mortgage payment is paying down principal, reducing the amount owing on your mortgage, and building equity in your home – owning a $500,000 would be the equivalent of paying $1,400 ($2,550 – $1,150) in rent.
Which way do you think is a better way to build longterm wealth and secure a place to live?
How much are you throwing away in rent each month?
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