RRSP vs. TFSA: Which is the Best Investment Tool for First-Time Home Buyers?
So you've decided you're ready to buy a home. Now the real work begins—saving enough money for a down payment.
“It's absolutely critical the down payment is a good size on a first home—somewhere in the range of 10 to 20%,” says Lesley-Anne Scorgie, a personal finance author. “The rationale simply being that the habit of saving is the same habit you'll need for actually owning a home—keeping up with the payments and preparing yourself and your bank account.”
There are many online mortgage calculators available to help you determine how much home you can afford. REALTOR.ca's mortgage affordability calculator can help guide you through this entire process. It's important to save a healthy down payment to avoid, what could be, steep mortgage insurance fees.
To help, the federal government has set up a number of tools you can use to build up sizeable savings, including Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). Each offer benefits for first-time home buyers to help them achieve their home purchasing goals.
“For most first-time home buyers who earn an income of over $60,000, the RRSP is a very good choice, as they're building up their down payment while they receive the benefits of a reduced tax bill,” said Scorgie. “That money can then be put towards further beefing up their RRSP, with the ultimate goal of taking out the money for buying a home.”
First-time home buyers can use their RRSPs towards their down payment, which again, isn't taxed. Recently, the federal government's 2019 budget increased the Home Buyers' Plan (HBP) withdrawal limit from $25,000 to $35,000. The repayment period starts two years after the funds are withdrawn, and one-fifteenth of the withdrawn funds need to be repaid each calendar year (over a max of 15 years) or it will be taxed as income.
“When you pool that with a spouse or a partner, they can each take out that amount in their RRSPs. When you have 15 years, that's a nice length of time to pay it back,” Scorgie said.
There is one drawback: When money is withdrawn from an RRSP, it's not invested in any financial markets but rather in the real estate market. Home buyers are trading off one market exposure for another. In real estate, your investment is exposed to the fluctuations of the local market. Meanwhile, money invested for the long-term in stocks, bonds or mutual funds is exposed to the changes in the financial market.
“If you feel you'd be better off making more money in the stock and bond market, keep your money there. Consider instead taking the money you need for the down payment out of a TFSA,” says Scorgie, adding it can also be a better option when household income is lower.
For example, if you've been over 18 since 2009, you would have TFSA contribution limit of $63,500 in total; $5,000 for each year from 2009 to 2012; $5,500 for each of 2013 and 2014; $10,000 for 2015; $5,500 for each of 2016, 2017 and 2018; and $6,000 for 2019. (TFSAs were not available before 2009).
“If you invest your money in a TFSA, there's no penalty for using that money for a down payment. You can also re-contribute all that money back because you get your limit back. You can keep saving. There aren't many drawbacks,” Scorgie said.
In the end, it really comes down to a personal preference between an RRSP and a TFSA. According to Scorgie, you could also use both to improve your savings power.
“In expensive markets, it's very common to use both,” explains Scorgie. I would say 90% of first-time buyers in expensive markets have to use both because of the limit of the RRSP.”
Saving for a down payment is hard work, no matter how you choose to do it. Be sure to take advantage of all the savings tools at your disposal and, before long, your dream of homeownership could become a reality. A REALTOR® can help recommend a mortgage broker, online tools, and make sure you're getting the most bang for your buck when negotiating the sale of your first home.
Mario, based in Calgary has 37 years of experience as a daily newspaper writer, columnist and editor.