TFSA or RRSP: Which should a 27-year-old homebuyer use for the down payment? – The answer lies in the Feds’ Home Buyers’ Plan
August 18, 2020
by Rob Carrick
A 27-year-old reader looking to buy a house with his longtime girlfriend has a question about putting together a down payment. They live north of Toronto, so this is a big deal. Expensive, I mean.
This couple is looking at a house in the $800,000 to $900,000 range and want a down payment of at least 20 per cent to avoid the cost of mortgage default insurance. The question is, where to draw the money from?
“I have heard from conflicting information on whether, alongside our cash savings, we should we access our RRSP for the down-payment on our first home or alternatively utilize our TFSA,” he wrote. “Which account would you recommend utilizing first for this large purchase?”
For some thoughts on this, I consulted investment adviser Ben Felix of PWL Capital in Ottawa. Mr. Felix is a millennial, so he has a good understanding of what young home buyers are up against in putting together a house down payment. Here’s what he wrote: “Strictly from a financial perspective I would take the money out of the RRSP under the HBP before taking it out of the TFSA.
“We only own the after-tax portion of whatever we see in our RRSP account, while we own 100 per cent of what is in the TFSA,” Mr Felix added. “Taking $35,000 out of the TFSA means giving up on the growth on $35,000 while also not paying mortgage interest on $35,000 – not a bad trade-off. If we assume a 30 per cent income tax rate, then taking $35,000 out of the RRSP means giving up on the growth on $24,500 (the portion of the RRSP that you own) while also not paying mortgage interest on the full $35,000 – a better trade-off.”
One point against tapping an RRSP using the federal Home Buyers’ Plan is that you have to make annual repayments of a portion of the amount you withdrew, Mr. Felix said. The default is a 15-year repayment schedule.