As my faithful reader (Hi, Dad!) knows, I’ve been working my way through Gordon Pape’s How TFSAs Can Make You Rich. In it, he tries to deal with many of the most common questions about Tax Free Savings Plans, one of which is whether it’s better to save your down payment for your first home in your TFSA or in your RRSP.
Forget Where You Need to Save: Where Do You Need to Buy your First Home?
A close relative lives in a small town in northern Ontario where you can buy a house for about $17,500. The paper mill has closed. The mines closed long ago. There are not a lot of new people coming to town looking to buy.
Another relative, though, lives in the Vancouver area. I believe the monthly payment on her condo mortgage and fees is close to $1,750 given that most single family homes in her area cost about $750,000 now. So she’s spending about $17,500 each year for her home.
Obviously where you have to buy is going to affect how much you have to save.
Let’s Get Realistic: You Need to Save for your First Home in BOTH your TFSA and your RRSP
If you live in one of the real estate war zones you will need a fortune to buy a home. You can try to buy with less but if you do, you will probably end up very stressed and money will be tight. The Globe and Mail wrote about this recently in The rise of the miserable Canadian homeowner.
The most you can take out of your RRSP under the Home Buyer’s Plan is $25,000. If the home you want to buy costs $400,000, that’s only 6.25% of the price.
If you’re 23 or older, then the most you could have saved in your TFSA to the end of 2013 before growth is $25,500. That’s another 6.375%.
Don’t forget on a $400,000 home you may be expected to pay about $10,000 in closing costs. That’s another 2.5% you need to find somewhere.
Closing costs include provincial land transfer taxes, and if you’re in Toronto: municipal land transfer taxes. They also include lawyer’s fees, bank and mortgage fees, title fees, paying back any pre-paid property taxes, paying to start new accounts with utilities, etc.
You do know that you are probably going to have to pay $4000 a year or so each and every year in property taxes, right? Will you have the money for next year’s taxes sitting in the bank after you’ve paid for your home?
I think you need to save for your first home in both your TFSA and your RRSP.
A Purely Numerical Reason to Save for your Home in your RRSP
In his book, Gordon Pape runs some numbers to see if there is a simple financial advantage to saving for your first home in your RRSP or your TFSA. Based on contributing $3500 a year in before-tax income, it works out that you can save the $25,000 for your home in 6 years using a RRSP and in 8 years using a TFSA. (The actual math is a bit complex: check the book if you want the details. And remember he’s assuming you take advantage of the higher rate of contribution to the RRSP because you can use “before tax” money. )
So if your goal is to get a down payment accumulated faster, using the RRSP is the winner.
And if you have to buy in a ghost town in northern Ontario, your RRSP is the perfect place to save the entire purchase price.
For many of the rest of us, though, as I’ve said at least twice before: I think you’ll need to save in both.
Did We Save in Our TFSA or Our RRSP?
We’re ancient. There were no TFSAs when we were saving for our first home. We did, however, save both in our RRSPs and in our regular bank accounts.
Are you saving for your first home? What strategies are you using to try to get there sooner? Please share your views with a comment.