Thursday, September 17, 2015 9:45 am ·  0 Comments
One of Stephen Harper’s campaign promises is that, if elected, his government will increase the amount that first-time homebuyers can withdraw from their RRSPs in order to buy a home. The current withdrawal limit in this program is $25,000 and Mr. Harper has pledged to increase this to $35,000.
I have been asked if this will really make a difference in a Town like Oakville where home prices are on the higher side of the national average.
First of all, any proposed new access to cash to help someone purchase a home of their own is a good thing. However, will this promise make any significant difference in Oakville if it comes to pass?
Detached Homes May Still Be Out of Reach, but Some Buyers Could Save
A starter detached resale home in Oakville in the current market is going to be somewhere, on average, in the $600,000 range (give or take). I will use $650,000 as an example. In order to avoid mortgage insurance fees you need a minimum down payment of 20 per cent of the purchase price of the home. So for a $650,000 home, you will need a down payment of $130,000. Currently, if you qualify for the Home Buyers’ Plan you can withdraw $25,000 from your RRSP without penalty in order to help with the purchase of your first home (note that you must pay back the money to your RRSP within 15 years).
So in this example, after you withdraw $25,000 from your RRSP you will still need to come up with another $105,000 for your down payment.
Under the proposed change, you would be able to withdraw an additional $10,000 from your RRSP (assuming you have it). So you would still need to come up with another $95,000 for the down payment on a $650,000 home, in order to avoid mortgage insurance fees.
Note that in the case of a couple where both buyers qualify; the benefit may be doubled, which would obviously be a greater benefit.
So at the end of the day, does this potential extra money help? Where it could have the biggest benefit for buyers of detached homes is to provide just enough extra cash to push them over the 20% mark on the down payment. This would allow the buyers to avoid the additional fees of an insured mortgage.
Buyers at the Lower End of the Market are Most Likely to Benefit
On a $250,000 condominium, the numbers look much better (yes, you can currently find a condo in Oakville for $250,000). A 20 per cent down payment would be $50,000 to avoid an insured mortgage. With $35,000 from the RRSP of a qualifying buyer, the remaining cash required would be $15,000 instead of $25,000 under the current RRSP withdrawal rules. That could make a difference in opening up home ownership to buyers looking for condominiums in this price range in Oakville.
So in most cases the extra $10,000 is probably not going to open up the possibilities of detached home ownership to someone in Oakville who cannot currently afford a home at all. It may prove beneficial to buyers who are looking at lower-priced condominiums, where the extra $10,000 would be a much larger percentage of the overall purchase price of the property.
Remember to Consider the Impact on Your Retirement Savings
As always, for any financial transaction of this magnitude my advice is to speak with your appropriate advisors to seek advice before you act. Anyone considering taking advantage of the RRSP withdrawal should speak with his or her investment advisor to ensure that the strategy makes sense for them. There may be tax implications and other considerations, so professional advice and guidance is recommended.
You can read full details on the Home Buyers’ Plan on the CRA website.