Question from Tony, 65, Calgary: My two children are planning to buy a house. They were preapproved for a mortgage loan of $520,000 at 2.64-per-cent interest, fixed for a term of five years. They are looking at buying a house costing about 600,000. For a down payment, is it advantageous to withdraw all their tax-free savings account and registered retirement savings plan investments to reduce their projected monthly payment of $2,464. It seems they wouldn’t like to touch their TFSA & RRSP investments.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc.
Your children can withdraw up to $25,000 each from their RSPs under the first-time Home Buyers’ Plan. If they do, they have 15 years to pay back the funds. Basically they are borrowing from themselves.
There are several factors they should consider before doing a withdrawal from their RSPs or TFSAs or both.
They should find out what the returns on their investments have been like. If they have been getting a greater return than what they are paying, then maybe it makes sense to keep the funds invested. If they are only investing in fixed-income instruments such as guaranteed investment certificates or bonds, then the funds would serve them better by reducing the mortgage.
You have not indicated what their income is, so the percentage of their mortgage payment and other expenses should be calculated to see if they are “house poor” or not.
Also, you have not indicated their ages and that can be a factor to consider. If they are in their 40s, they may not want a debt hanging over their heads when they reach retirement age. Is this just a starter home and they will be upgrading in future?
Are they in their 20s and looking to use this as an entry into the housing market? These are a couple of questions that need to be looked at.
For now, I would suggest that they stop contributing to their TFSAs and RRSPs and apply those extra funds to help pay down the mortgage. The benefit is that the contribution allowance that they don’t use now will accumulate for future use. If they can pay the mortgage at the monthly payment of $2,464 comfortably, then go ahead and leave the existing savings intact. If they think they will be struggling to make the payments, then they should be looking at a house at a lower price point and therefore reducing the amount of mortgage in the first place.
Every $10,000 they reduce from the initial mortgage amount decreases the monthly payment by approximately $130.
Before making such a big commitment, it wouldn’t hurt for them to seek professional financial planning advice. They’ll be able to enter the world of home ownership well informed and with financial direction and goals.