You’ve taken the first step and booked an appointment with an advisor. Nice! But, now what? Here’s a rundown of how you can prepare – and what you can expect from your first meeting with your advisor.
September 30, 2024
Can you balance buying a home with saving for retirement?
By Sun Life Staff
In response to the housing crisis, many programs have been set up to help Canadians become homeowners. That’s good news, if we don’t lose sight of the importance of saving for retirement.
The Canadian real estate market is still on steroids, with an average selling price of $703,446 in April 2024. With interest rates remaining high, it’s getting harder to purchase a home. To help Canadians become homeowners, several measures have been taken since 2023:
- Creation of the FHSA, the tax-free first-home savings account, a hybrid between an RRSP and a TFSA
- Increase in the HBP (Home Buyers’ Plan) withdrawal limit from $35,000 to $60,000
- Extension of the HBP for the start of the repayment period from two to five years
- Extension of the mortgage amortization period from 25 to 30 years for first-time buyers
You can take advantage of one or more of these measures simultaneously to purchase the home of your dreams.
For example, you can withdraw money from your FHSA and RRSP to make a down payment that will reduce the amount of your mortgage. A lower mortgage means smaller monthly payments, giving you more flexibility in your budget.
Balancing home ownership and retirement
The dream of home ownership at all costs comes with risks. “If you put all your savings into buying a home, you may lose sight of the importance of saving for retirement,” warns Alexandre Demets, Financial Security Advisor at Sun Life (in French only). Financial security advisors recommend setting aside at least 10% of your income to build up retirement capital.
Let’s take the example of a 25-year-old Laval man who earns $60,000 a year. He dreams of owning a home by age 30. To build up his down payment, he contributes the maximum of $8,000 per year to his FHSA (lifetime maximum of $40,000). He contributes the same amount to his RRSP. Let’s imagine he gets an annual tax refund of $5,000 at his tax rate. His actual financial outlay is $11,000 per year, representing 18% of his income. This is quite a considerable savings rate.
After five years, he will have contributed $40,000 to his FHSA and $40,000 to his RRSP to participate in the HBP (Home Buyers’ Plan). Assuming a good return on his investments, he’ll have a nice down payment of $100,000 after five years plus returns accumulated in the FHSA. “He’ll be in a good position to buy a home, but this financial outlay doesn’t include anything for retirement,” notes Demets.
Will he be able to save once he’s a homeowner? Five years after buying a home, the man from Laval will have to repay the loan to his RRSP, a sum of $2,667 per year. He’ll also have to repay his mortgage, pay off his car and provide for his children if he became a father. “At that point, it will be very difficult to save,” says Demets.
Home purchase vs. retirement savings
Using the FHSA and HBP will have a significant impact on your retirement savings. Not that you shouldn’t take advantage of these home ownership programs, but you do need to understand their impact.
Let’s go back to the man from Laval who bought a home at age 30 using $40,000 from his RRSP. He’ll have to repay this loan after five years over a fifteen-year period, in payments of $2,667 per year. This table shows the value of his RRSP after 15 and 35 years.
| Return * | After 15 years | After 35 years |
|---|---|---|
| 3% | $50,425 | $91,811 |
| 5% | $70,418 | $191,018 |
| 7% | $84,548 | $341,467 |
* The rates used are for example only.
If he hadn’t “HBPed” that $40,000, here’s how much he would have built up in his RRSP account.
| Return * | After 15 years | After 35 years |
|---|---|---|
| 3% | $62,697 | $114,156 |
| 5% | $84,548 | $229,348 |
| 7% | $113,957 | $460,246 |
* The rates used are for example only.
This shows that using home ownership programs has an impact on retirement savings. For example, there’s a $38,330 ** difference between the “non-HBPed” RRSP and the “HBPed” RRSP after 15 years.
** To obtain the difference of $38,330, you must compare the amounts accumulated after 35 years.
With so many programs in place, buying your first home has become a financially complex undertaking. “It’s more important than ever to consult a financial security advisor to understand the ins and outs of these financial measures,” says Sun Life financial security advisor Alexandre Demets.
Work with a financial security advisor to create a plan that will protect your future.
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.
