Saving for a house

Leveraging, renting vs owning, making an investment or buying a home?
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Saving for a house

Post by adrian2 »

mcbar wrote:I guess what I'm asking is, for a person who's MTR is likely to increase, does the HBP offer any significant advantage over just saving in a TFSA?
In those circumstances, why not put your money in an RRSP and ponder whether to use the deduction immediately or (partially) deferred? How would a TFSA be any better?

An RRSP strategy (as above) would allow to:
- receive US source income with no withholding tax (TFSA would get dinged);
- have at least the same amount invested initially;
- have the same no tax environment to grow in the interim;
- decide how/when to time the deductions;
- decide whether to use the HBP or not (I see no reason why not to).
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Saving for a house

Post by adrian2 »

Shakespeare wrote:I found it very useful. As a retiree with limited income, I would not have qualified for a mortgage even if I wanted one; I used the HBP to supplement my non-registered cash with no intention of paying the HBP back. Thus, it now comes in my income on a deferred basis, which is worth a certain amount depending upon the discount rate you use.
Yet another use for the HBP: get the money out of the RRSP "now", pay the tax over 17 years, with no extra charges. Other people would obviously use it in other manners, but flexibility is good, and does not make it a "rigamarole".
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
User avatar
Pickles
Veteran Contributor
Veteran Contributor
Posts: 4215
Joined: 27 Sep 2006 09:44
Location: Toronto

Re: Saving for a house

Post by Pickles »

Thanks adrian2 and Shakespeare for your responses. I hadn't thought of people trying to avoid CMHC insurance -- I was taught not to buy until I had a 25% downpayment.... And Shakespeare provided a good example of someone using the HBP as an alternative to a mortgage.
Regards,
Pickles
User avatar
mcbar
Contributor
Contributor
Posts: 226
Joined: 23 Oct 2012 11:03

Re: Saving for a house

Post by mcbar »

adrian2 wrote: An RRSP strategy (as above) would allow to:
- receive US source income with no withholding tax (TFSA would get dinged);
- have at least the same amount invested initially;
- have the same no tax environment to grow in the interim;
- decide how/when to time the deductions;
- decide whether to use the HBP or not (I see no reason why not to).
I guess the only advantages of the TFSA then would be:
- flexibility to use it for something other than retirement, a house or education if desired
- no obligation to "pay it back"

Depending on the pre-payment terms of one's mortgage, might a TFSA be better in some cases if it allows the individual to pay down the mortgage more quickly?

Just asking for the benefit of my own understanding. I didn't even know that the tax credit from RRSP contributions could be deferred - that's an important bit of information!
"The mob rushes in where individuals fear to tread." --BF Skinner

"He has a right to criticize, who has a heart to help." --Abraham Lincoln
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Saving for a house

Post by adrian2 »

mcbar wrote:I guess the only advantages of the TFSA then would be:
- flexibility to use it for something other than retirement, a house or education if desired
Your original question was "for a person who's MTR is likely to increase, does the HBP offer any significant advantage over just saving in a TFSA?" which implies one wants to buy a home sometimes in the (near) future.
The HBP is tied, inter alia, to purchasing a home; you cannot compare the HBP with another strategy and say that the HBP cannot be applied to education financing.
mcbar wrote:- no obligation to "pay it back"
If you decide, after careful consideration, that you're not going to use the RRSP deduction in the beginning, you could time the deduction to coincide with the schedule of mandatory repayments to the HBP, thus neutralizing any taxes. It's, in a way, similar to what Shakespeare has done, although I'd guess it's a small minority of cases where it makes sense. But in that scenario, there is no obligation to pay it back.
mcbar wrote:Depending on the pre-payment terms of one's mortgage, might a TFSA be better in some cases if it allows the individual to pay down the mortgage more quickly?
You can pay back the HBP as fast as you want (at least the minimum mandated per year). Basically it's a mortgage from yourself allowing for 100% pre-payment.

So I'd say you could not find one reason where saving in a TFSA for a first home purchase would be better than in an RRSP + HBP. The only reason I could think is where one has no RRSP room.
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
gsp_
Veteran Contributor
Veteran Contributor
Posts: 2318
Joined: 12 Apr 2011 17:48
Location: Montreal

Re: Saving for a house

Post by gsp_ »

adrian2 wrote:- decide whether to use the HBP or not (I see no reason why not to).

...

So I'd say you could not find one reason where saving in a TFSA for a first home purchase would be better than in an RRSP + HBP. The only reason I could think is where one has no RRSP room.
I tend to agree with you on most financial matters but I'm having a hard time seeing a real benefit to HBP for high savers.

Of course it's useful for the many who couldn't otherwise afford any downpayment, a 20% downpayment(CMHC) or who couldn't otherwise afford the house(ratios). Not so sure that's really such a good thing in the end but I digress.

For those who are already maxing out RRSPs and TFSAs and saving in taxable accounts, what value is there in this program? Surely someone investing in equities inside their RRSP is expecting a return superior to the piddly 2.99% mortgage rates currently available?

Replacing even lower returning FI by paying off the mortgage sooner I can understand but foregoing tax deferred equity growth for the same purpose doesn't make much sense to me.

Am I missing something?
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Saving for a house

Post by adrian2 »

gsp_ wrote:I tend to agree with you on most financial matters but I'm having a hard time seeing a real benefit to HBP for high savers.

[...]

Am I missing something?
You're not missing anything, and I'll just echo that I tend to agree with you on most financial matters. :)
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
User avatar
mcbar
Contributor
Contributor
Posts: 226
Joined: 23 Oct 2012 11:03

Re: Saving for a house

Post by mcbar »

Keep in mind I'm not arguing against you, merely trying to increase my own understanding :) As I said, I wasn't even aware that deferral of RRSP contribution tax credits was an option, so clearly I still have a lot to learn - but I'm still a little unclear on this.
adrian2 wrote: Your original question was "for a person who's MTR is likely to increase, does the HBP offer any significant advantage over just saving in a TFSA?" which implies one wants to buy a home sometimes in the (near) future.
The HBP is tied, inter alia, to purchasing a home; you cannot compare the HBP with another strategy and say that the HBP cannot be applied to education financing.
What we're really talking about is saving for a house in an RRSP vs a TFSA. My understanding is that money saved in an RRSP can only be accessed for retirement, a house (HBP) or education (LLP). The TFSA of course does not have this restriction. Circumstances change, it's entirely possible a person may start saving for a house and then reconsider.
Depending on the pre-payment terms of one's mortgage, might a TFSA be better in some cases if it allows the individual to pay down the mortgage more quickly?
You can pay back the HBP as fast as you want (at least the minimum mandated per year). Basically it's a mortgage from yourself allowing for 100% pre-payment.

So I'd say you could not find one reason where saving in a TFSA for a first home purchase would be better than in an RRSP + HBP. The only reason I could think is where one has no RRSP room.
I'm still confused about this. Here come some assumptions and fuzzy math.

Suppose a person has managed to save $50000 for a $250000 house. Assuming a 20% tax credit, person R will have $60000 while person T will have $50000. For the sake of convenience, lets say a 3% mortgage over 25 years. Person R will have to contribute $4000 to their RRSP each year for the first 15 years, person T will instead use that $4000 as their annual lump sum payment.

At the end of 15 years, person R has ~$82000 remaining on their mortgage. Person T has significantly less at ~$22000.

I feel like I must be overlooking something.
"The mob rushes in where individuals fear to tread." --BF Skinner

"He has a right to criticize, who has a heart to help." --Abraham Lincoln
Flaccidsteele
Veteran Contributor
Veteran Contributor
Posts: 4523
Joined: 06 Mar 2014 12:52
Location: Retired Gen Xer somewhere on the planet earth

Re: Saving for a house

Post by Flaccidsteele »

mcbar wrote:My understanding is that money saved in an RRSP can only be accessed for retirement, a house (HBP) or education (LLP).
I don't think that this is exactly true. I can access my RRSP whenever I want. It doesn't have to be accessed simply for retirement, a house or education. There's simply a withholding tax (as there should be).
jeremy
Contributor
Contributor
Posts: 421
Joined: 18 Nov 2010 13:53

Re: Saving for a house

Post by jeremy »

mcbar wrote: Suppose a person has managed to save $50000 for a $250000 house. Assuming a 20% tax credit, person R will have $60000 while person T will have $50000. For the sake of convenience, lets say a 3% mortgage over 25 years. Person R will have to contribute $4000 to their RRSP each year for the first 15 years, person T will instead use that $4000 as their annual lump sum payment.

At the end of 15 years, person R has ~$82000 remaining on their mortgage. Person T has significantly less at ~$22000.

I feel like I must be overlooking something.
Person R would also have an RRSP worth ~$60k, while person T would have an RRSP worth $0.
gsp_
Veteran Contributor
Veteran Contributor
Posts: 2318
Joined: 12 Apr 2011 17:48
Location: Montreal

Re: Saving for a house

Post by gsp_ »

mcbar wrote:Suppose a person has managed to save $50000 for a $250000 house. Assuming a 20% tax credit, person R will have $60000 while person T will have $50000. For the sake of convenience, lets say a 3% mortgage over 25 years. Person R will have to contribute $4000 to their RRSP each year for the first 15 years, person T will instead use that $4000 as their annual lump sum payment.

At the end of 15 years, person R has ~$82000 remaining on their mortgage. Person T has significantly less at ~$22000.

I feel like I must be overlooking something.
Lots of issues here.

First, your example needs to be a couple to have 50k of HBP eligibility. Next there isn't 60k to pay back, just 50k so $3333 each year. Your ending balances also don't make sense, use a mortgage calculator to get more accurate numbers. The lump sum payments will reduce your mortgage balance more than the sum of the additional payments as they'll save you interest. However as pointed out above, you also didn't factor in the value of the RRSP nor its growth.
User avatar
mcbar
Contributor
Contributor
Posts: 226
Joined: 23 Oct 2012 11:03

Re: Saving for a house

Post by mcbar »

A month later and I'm still thinking about this...

I'll admit a certain amount of dyslexia when it comes to math, which seems to have hampered my ability to communicate. That said, I did use a mortgage calculator to come up with ballpark final amounts. I think the difference gsp noticed is due to the tax refund from the RRSP being applied to the downpayment, which was an assumption I made but didn't explicitly state. Perhaps it doesn't matter since I overlooked the maximum amount that can be used for the HBP...

I guess what I'm wondering is, in a general sense, is it not better or at least equivalent to apply the money that would have gone to paying back one's RRSP as an annual lump sum payment towards the principle amount of the mortgage?

Certainly there are a lot of variables, the performance of the RRSP being a major one. I suppose a person might decide that they would be better off investing in equities than paying down their 3% mortgage as quickly as possible and choose to go that route instead. But rising interest rates could make paying down the mortgage more advantageous. Of course, no one can anticipate either of these things in advance.

As adrian mentioned foreign withholding tax is certainly a factor, although on a diversified account <$25000 I wonder how much of a difference it makes?

I suppose this is all irrelevant if one were fortunate enough to be able to pay back their RRSP and still make full use of their mortgage's prepayment options. Perhaps not a situation many first time home buyers would find themselves in, but worth considering.

I still feel like saving for a house in a TFSA provides one with increased flexibility which could allow them to pay down the mortgage principle more quickly, despite having a smaller down payment due to the lack of a tax refund. Perhaps someone more numerically inclined than myself could provide an example with some math? (would certainly help me wrap my head around this, as I seem to be having trouble understanding the difference)
"The mob rushes in where individuals fear to tread." --BF Skinner

"He has a right to criticize, who has a heart to help." --Abraham Lincoln
Post Reply