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Kevin Greenard: Coming up with the down payment for your home

Last week, we encouraged those individuals interested in purchasing either a condo or a single-family dwelling to understand the financial numbers and to set goals.
Kevin Greenard

Last week, we encouraged those individuals interested in purchasing either a condo or a single-family dwelling to understand the financial numbers and to set goals. I have heard many people say that the prices in Victoria are excessive and that it is impossible for young people to purchase a residence. It may be more difficult than in years past, but it certainly is possible if you set your mind to it. Many things in life that are worthwhile take time and patience — purchasing your first home is no different.

Getting trained and educated

I share with my own kids the importance of getting an education on a weekly basis. It is not about sitting in a classroom and hoping that a teacher motivates you to absorb the informed presented. It is about motiving yourself. It is about wanting to read and wanting to learn. Education normally translates to higher income. I’m always telling my kids to pay attention to everything around them and try to surround themselves with intelligent people. Successful people are self-motivated and good listeners. Having skills that create higher income is necessary not only to come up with a down payment on a home but to be able to service the debt, insurance, property taxes, repairs and maintenance going forward.

Working hard and savings

Taking on more responsibility at work, working longer hours and working harder should translate to you accumulating more savings for a down payment. If you put the minimum number of hours in, then accumulating the required savings for a down payment may be a frustrating concept, especially if house prices are rising every year. At least for the years leading up to your first house purchase, we would recommend putting in extra hours at work. Some would say this is short-term pain for long-term gain, which could be true for people that don’t enjoy their jobs. I personally have found the years where I was working extra hard to be really rewarding. It was such a nice feeling to achieve specific goals.

Setting goals and knowing the numbers

In our last column we outlined the key ratios and approximate numbers to give people an idea of the costs of purchasing either a condo or a single-family dwelling. Setting goals is really important if you want to make a significant purchase. Once you know how much you have to set aside every month then you can create a budget. You may find it takes several years to reach your goal. Once you keep track of all your expenses you can determine what you are spending all your money on. You might be surprised at how much you spend going out for breakfast, lunches, dinners, and coffees. Eating breakfast and dinner at home, and making a lunch might enable you to save a little more towards your important goals. Over time, those numbers add up.

Goal of funding the down payment

Ideally, when you purchase your first home you can get away from the cost of mortgage insurance. In order to do this, you will have to put 20 per cent down. For the purposes of this article, we will use the average selling price of a single-family home in Victoria, which was $846,500.00 at the end of September, according to the Victoria Real Estate Board. Also, for illustration purposes, we can use the average selling price of a condo being $511,600.00 in Victoria per VREB at the same point in time. The down payments for a house and condo would be $169,300 and $102,320, respectively.

Below we have mapped out some ideas for those who have been able to set aside some funds with respect to coming up with a down payment.

Utilize the RRSP Home Buyers Plan (HBP)

People who begin contributing to an RRSP may not own a house yet. Does it make sense to contribute to an RRSP if you think you will need to keep funds liquid to buy a home?

In some cases, the answer is yes, especially if a person is earning good income. The HBP allows participants to withdraw up to $35,000 in a calendar year from an RRSP to buy or build a qualifying home. Couples may each utilize the HBP (combined maximum of $70,000). The plan may be suitable for any first-time home buyers who are buying a home and may need additional funds to pay for a down payment or reduce financing costs. As mentioned above, a larger down payment may eliminate the costs to insure the mortgage.

The HBP is open only to first-time buyers and applicants should check for specific details on who can apply. Participants in these plans should understand that withdrawals need to be repaid or have the amount included as taxable income.

The first repayment is due two years after you first withdrew the money. If you withdrew the money in 2019 you will not have to begin payments until 2021. Each year, Canada Revenue Agency will send you a Notice of Assessment with a statement including: amount repaid (including any additional payments), HBP balance, and the amount of the next repayment to make. Participants have up to 15 years to repay the amount that is withdrawn under the HBP. Generally, each year the repayment amount is approximately 1/15 of the total amount withdrawn until the full amount is repaid to your RRSPs. For example, if Bill and Wendy each withdrew $35,000 from their respect RRSP accounts in April 2019, they must each pay at least 1/15th (or $2,333.33) of the original withdrawal starting in 2021 (or the first 60 days of 2022).

Withdrawals from an RRSP account are generally considered taxable income. Financial institutions are required to withhold the following tax on RRSP withdrawals: 10 per cent on the first $5,000, 20 per cent between $5,001 and $15,000, and 30 per cent on amounts greater than $15,000. A qualifying HBP withdrawal is one of the exceptions to this rule. If you give the financial institution a signed T1036 (HBP) then this allows a financial institution to release the full amount of funds (up to $35,000) to you without withholding tax.

It is important to ensure that $35,000 is earmarked in your RRSP within a year of the required withdrawal. You do not want to have this in speculative holdings that could potentially decline with market declines at the same time you need to pull the funds out.

Maximize the Tax Free Savings Account

The Tax Free Savings Account (TFSA) is an ideal account for young people to save for a house. If in 2009 you were 18 years of age or older then you would have accumulated up to $63,500 in TFSA room. The following are the annual and cumulative limits:

Year  Annual limit Cumulative limit
2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500
2019 $6,000 $63,500

We recommend investing the TFSA in a manner that is consistent with your own personal time horizon and risk appetite. If you are several years away from purchasing a home then investing in primarily medium risk equities may provide some additional growth (capital gains and dividends) over time. If you are within 12 months of purchasing a home then we recommend ear marking the funds in either cash equivalents or short-term fixed income to ensure you are not impacted by short-term equity market volatility.

For couples purchasing a home it is possible to each have contributed $63,500 into a TFSA (or $127,000). In addition to the contributions you will also have the accumulated growth in these accounts that can be withdrawn.

Non-Registered Investment Account

Once you have maximized the TFSA and hit the $35,000 thresh hold within your RRSP then we encourage opening up a non-registered investment account. For younger individuals who have specific goals, I often will encourage “compartmentalizing” the savings function. If you have a dedicated investment account, you can set up a pre-authorized monthly contribution (PAC).

Hierarchy - House

Below is a guideline for down payment savings in order to purchase a house:

  TFSA RRSP Non-Registered Total Savings
Individuals $63,500 $70,000 $35,800 $169,300
Couples $127,000 $42,300 $0 $169,300

Below is a guideline for down payment savings in order to purchase a condo:

  TFSA RRSP Non-Registered Total Savings
Individuals $63,500 $38,820 $0 $102,320
Couples $127,000 $0 $0 $102,320

I believe the sooner you purchase a house and quit paying rent, the better off you will be. The power of compounding wealth over time is a key concept I wish I could easily explain to young people. Sacrificing in the short-term to get this done is well worth it in the long run.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at Call 250-389-2138.