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How to balance saving for a home and retirement
January 23, 2025
By Sun Life staff
Great news for Canadians! New programs are addressing the housing crisis, making homeownership more accessible. With smart planning, can you balance buying a home with your retirement goals too?
Dreaming of buying your own place? You're not alone, but wow, the Canadian real estate market is wild! In November 2024, the average home in Canada sold for $694,411. That’s up 7.4% from November 2023. Yikes, right? And with interest rates remaining high (albeit, down recently), it’s getting tougher to make that dream a reality. Especially if you also have that other major financial goal in mind: retirement!
While homeownership is a common goal, it's crucial not to neglect retirement savings in the process. If you put all your savings into buying a home, you may lose sight of the importance of saving for retirement. Saving for both isn’t impossible if you’re smart about it! Here are some strategies to balance saving for your first home and your retirement.
1. Use government programs wisely
Since 2023, there have been some new measures put in place to help Canadians like you become homeowners:
- 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. You could 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.
Throughout, we’ll look at a scenario of how this all may work. In this example, a 25-year-old man, who earns $60,000 a year, 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 $4,791 at his tax rate. His actual savings is $11,000 per year, representing 18% of his income. This is quite a considerable savings rate! Will he make his dream a reality?
2. Maintain retirement savings
Advisors recommend setting aside at least 10% of your income to build up retirement capital. And, if you’re using the HBP, plan to repay the withdrawn amount to your RRSP as quickly as possible to minimize the impact on your retirement savings.
3. Create a balanced savings plan
Divide your savings between home and retirement goals. For example, you can contribute to both your FHSA and RRSP simultaneously. And you can adjust the ratio based on your priorities and timeline for home purchase.
After five years, the man in our example is now 30 and ready to buy his first home. By this time, 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 doesn’t include anything for retirement. Will he be able to save once he’s a homeowner?
4. Consider the long-term effects
Using the FHSA and HBP can 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 our example of the man who bought a home at age 30 using $40,000 from his RRSP. Five years after buying his home, he’ll 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 becomes a father. At that point, it will be very difficult to save.
This table shows the value of his RRSP after 15 and 35 years.
| Rate of 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.
| Rate of 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. In this example, there’s a $38,330 ** difference between the “non-HBPed” RRSP and the “HBPed” RRSP after 35 years.
** To obtain the difference of $38,330, you must compare the amounts accumulated after 35 years at the 5% rate of return.
5. Avoid overextending on a home purchase
When you do buy a home, choose one in a price range that allows you to continue saving for retirement after purchase. Factor in all homeownership costs, including mortgage payments, property taxes, and maintenance.
6. Seek professional advice
With so many programs in place, buying your first home has become a financially complex undertaking. It’s more important than ever to consult an advisor to understand the ins and outs of these financial measures. You can work with an advisor to create a personalized plan that addresses both your home ownership and retirement goals.
By carefully balancing these strategies, you can work towards homeownership while still maintaining a strong focus on your retirement savings. Remember, the key is to find a sustainable approach that doesn't sacrifice your long-term financial security for short-term goals.
Work with an 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.
