# Where to put saved money to buy a house?



## Taxsaver (Jun 7, 2009)

In a few months, I will have paid off all my debts. Once I have extra money for saving for house, where should I put it? Thanks.


----------



## Taxsaver (Jun 7, 2009)

I've just read in another thread Van123 mentionning investing in RRSP's and use the tax refund from it to put on down payment or mortgage payment. I realize I should read a few books on personal finance to educate myself at least on the basics before annoying you with my questions.


----------



## FrugalTrader (Oct 13, 2008)

If you put the extra money in an RRSP, you can take advantage of the RRSP home buyers plan (HBP). If you manage to max that out ($25k), the next logical step would be to use the TFSA ($5k every year). If you manage to max out everything, then perhaps use a high interest savings account.


----------



## Ben (Apr 3, 2009)

FrugalTrader said:


> If you put the extra money in an RRSP, you can take advantage of the RRSP home buyers plan (HBP). If you manage to max that out ($25k), the next logical step would be to use the TFSA ($5k every year). If you manage to max out everything, then perhaps use a high interest savings account.


Good answer. 

Taxsaver:

Next question you might be wondering is what to hold in the RRSP/TFSA. To make a general point, if buying the house within a few years, then low risk investments (ie. not stocks) are the way to go. When saving for a downpayment on a house, you can't really afford to lose the money in a market crash. You can hold GIC's within your RRSP, for example, and still get the tax refund and make use of the HBP.

I know very little about investing, so would leave it to others to offer more specifics on what to hold.


----------



## canadianbanks (Jun 5, 2009)

I would go for TFSA and RRSP as well.


----------



## lb71 (Apr 3, 2009)

If you plan on buying a home in the next few years, you should stick to a high interest savings account or short term GICs. As Ben mentioned, you do not want to get lose any money due to short term volatility in the markets.

Invest the first $5,000 this year in a TFSA, the rest in a non-TFSA. Top up the TFSA as the contribution limits increase each year.

You can use the RRSP Home Buyer’s Plan, but realize that you will have to pay back at least 1/15th of the amount each year over 15 years. If you max out the $25,000 HBP that works out to $140 a month on top of your mortgage payments (assuming you have a mortgage). It does, however, give you the benefit of an additional down payment since you can leverage off of your tax return. So say you contribute $25k over a period of time and are in a 40% tax bracket, you would have received a $10k refund. If you had saved that refund, you would now have $35k as a down payment.


----------



## leslie (May 25, 2009)

I strongly disagree with using RRSP money for real-estate downpayments. It is clear from questions on other BB that people get very confused once in this situation.

Borrowing from your RRSP should be thought of as borrowing from the government. Not only will they demand repayment, but they have huge sticks to bash you on the head if you don't.

Don't feel that you are forgoing the tax refund from RSP contributions. That refund is a red-herring in almost all analysis. When you eventually take your $$ out of the RSP you will have all the original tax refund PLUS ALL THE INCOME EARNED ON THAT REFUND taxed away. See this in action on Sheet 3 of this XLS.

Invest the savings for the downpayment in the TFSA or even outside all tax accounts. KISS

You might look at some of the preferred shares that have a retset value in 5 years at such a large spread over treasuries that it is inevitable they will be redeamed. E.g. BAM.pr.P at 7% There are others as well - all issued in the last 6 months.


----------



## CanadianCapitalist (Mar 31, 2009)

I'll put down payment savings in a RRSP and take advantage of the Home Buyers Plan. I don't feel the repayment obligations are too onerous but make sure the repayment is done.

After maxing out the RRSP, I'll put the rest in a TFSA. As others have pointed out, savings earmarked for near-term purposes should be held in very safe instruments such as GICs, not stocks or corporate bonds.


----------



## lb71 (Apr 3, 2009)

leslie said:


> Borrowing from your RRSP should be thought of as borrowing from the government.


However, you are borrowing at a 0% interest. 



> Don't feel that you are forgoing the tax refund from RSP contributions. That refund is a red-herring in almost all analysis. When you eventually take your $$ out of the RSP you will have all the original tax refund PLUS ALL THE INCOME EARNED ON THAT REFUND taxed away.


Not sure I would call it a red herring. That refund is the tax you paid on that income. Yes, you will have to return it to the government down the road when you withdrawal from your RRSP, but why it that a bad thing? It should be worth more since it accumulated tax free, and in a lot of cases it would be withdrawn at a lower marginal tax rate.


----------



## canadianbanks (Jun 5, 2009)

leslie said:


> Don't feel that you are forgoing the tax refund from RSP contributions. That refund is a red-herring in almost all analysis. When you eventually take your $$ out of the RSP you will have all the original tax refund PLUS ALL THE INCOME EARNED ON THAT REFUND taxed away.


Yes, but until you start taking money out of it your capital can grow tax free, which is actually one of the greatest benefits of RRSP.


----------



## leslie (May 25, 2009)

Neither of the two posters above read what I capitalized in the original post, or checked the proof at the link given. Why not?

The tax refund DOES NOT GROW TAX FREE - IT DOES NOT EVEN GROW.


----------



## lb71 (Apr 3, 2009)

leslie said:


> Neither of the two posters above read what I capitalized in the original post, or checked the proof at the link given. Why not?
> 
> The tax refund DOES NOT GROW TAX FREE.


You are correct, the tax refund does not grow tax free, but so what? Your RRSP is growing tax free. And I did check out the link, but found it confusing and it proved nothing.

Assume you are in a 40% tax bracket and your investment earns say 6% over 30 years. Lets make a $1000 contribution to an RRSP. This will result in a $400 refund. Your $1000 after 30 years is now 1000*1.06^30 = $5,743. You withdrawal this out of your RRSP and net $3,446 after tax. Plus, you had your $400 refund, which if also invested in a non registered (taxable) account would have netted you 400*1.036^30 = $1,156. Thus your total after tax amount after 30 years is $4,601.

If you had instead invested in a non registeread account, you would have 1000*1.036^30 = $2,889 after 30 years.

So what would you rather have, 4601 or 2889? Plus, hopefully you will be withdrawing at a lower marginal tax rate, so your 4601 will be even higher.


----------



## cardhu (May 26, 2009)

leslie said:


> I strongly disagree with using RRSP money for real-estate downpayments.


Leslie ... you did not read the above responses ... they are not proposing to use RRSP money for real estate downpayments ... they are proposing to use downpayment money for real estate downpayments, but channelling it through the RRSP beforehand ... they are not the same thing. 



> Borrowing from your RRSP should be thought of as borrowing from the government. Not only will they demand repayment, but they have huge sticks to bash you on the head if you don't.


Conspiracy theory nonsense ... and like most conspiracy theories, this one is all delusion, and no substance ... when you draw money from your RRSP, through the HBP program, it is your own money you are borrowing ... not the government’s money ... the only stick the big bad gov’t has is the ability to treat the withdrawal as taxable income, if the HBP conditions aren’t met ... which, by the way, is no different than ANY other withdrawal that you will EVER make from RRSP, or RRIF. 



> Don't feel that you are forgoing the tax refund from RSP contributions. That refund is a red-herring in almost all analysis.


Leslie ... you are misunderstanding some things ... there may be some defective analysis floating around that shows it to be a red herring, but a proper analysis does not ... the tax break on contribution is the single biggest reason that the RRSP succeeds in outperforming most other approaches. 



> When you eventually take your $$ out of the RSP you will have all the original tax refund PLUS ALL THE INCOME EARNED ON THAT REFUND taxed away.


That may be the case for some people, but only in a very specific set of circumstances... most people, however, will not fit into that very narrow set of circumstances ... the majority of the population will face a lower tax rate on withdrawals than on contribution ... many people will not only end up with ALL THE INCOME EARNED ON THAT REFUND in their pocket, after tax, to spend as they see fit, but they will also keep part of the original refund ... 

In other words, the tax refund MAY VERY WELL GROW TAX FREE


----------



## FrugalTrader (Oct 13, 2008)

Great response and welcome to the forum *cardhu!*


----------



## stephenheath (Apr 3, 2009)

Since the originator of the post seems to be a younger person just starting out who has been focused on paying off his or her debt, it seems quite likely that they have RRSP contribution room built up... therefore, it might be possible to not only contribute into the RRSP aiming towards the maximum withdrawal of $25,000, but include the refunds towards that goal.

For example, during year 1 of savings taxsaver might put $10,000 into the RRSP and maybe get a $3,000 tax refund. In year 2, he/she could stop at say $8,000 of savings + the $3,000 tax refund, bringing the RRSP up to $21,000 + some interest and getting a tax refund of maybe $3300 the next year. Throw that into the RRSP and along with interest on the balance you should be nearing the $25,000 mark. 

This way, noone has to worry about the tax refunds being heavily taxed, and since taxsaver sounds like they are 30-40 years away from retirement, that $25,000, after it is put back, will easily grow so much tax free that it will be a huge profit even with the highest tax bracket on withdrawals.


----------



## lb71 (Apr 3, 2009)

FrugalTrader said:


> Great response and welcome to the forum *cardhu!*


+1


----------



## Taxsaver (Jun 7, 2009)

Thanks everyone for your input so far. Tomorrow is my day-off, so I'll have more time to read and learn about money management. For now let me give me some information about me. 

1. I'm a 44 Y.O., single, who has ZERO RRSP at this time. I know... 

2. The only debt I have is a line of credit of about $10K.

3. I have a Register Pension Plan paid exclusively by my employer. I have about $6K accumulated. I understand that this money is frozen until I'm 65.

4. I learned that my employer matches whatever I put in a RRSP up to 4% of my. For instance, if I contribute 4% of my gross annual income (between $42K and $47K), so let's say $1680 at minimum, my employer will also contribute $1680 which is very generous. I will give them my filled out form on Friday so we can start the process immediately.  That will be a deduction of about $125 a month.

5. Soon I will start working 7 days a week for the next few years. That will bring me an additional monthly amount of about $600 (after tax). 

One question:

Is it a good idea to borrow $7000 from by line of credit and buy RRSP with it? Let's say I make a lump payment of this amount, do I get a refund cheque from the government right away, or do I get it at the end of the year?

I will have an extra $900 this Friday. I'm waiting for your replies to determine what to do with it.  Thanks a lot!


----------



## lb71 (Apr 3, 2009)

Taxsaver said:


> Is it a good idea to borrow $7000 from by line of credit and buy RRSP with it? Let's say I make a lump payment of this amount, do I get a refund cheque from the government right away, or do I get it at the end of the year?
> 
> I will have an extra $900 this Friday. I'm waiting for your replies to determine what to do with it.  Thanks a lot!


I'm not a big fan of this strategy since the interest on the RSP loan is not tax deductible. The refund comes when you do your taxes, not right away. Since you already have $10k in debt as it is, I would not suggest this strategy. Instead, work on paying off your current debt, and contribute to your RSP plan at work to maximize your employer's match. Check into your RPP plan as well, since it may allow your to contribute to it with additional employer matches. It would also be a good idea to get that LOC paid off before you purchase a house. Work on a plan to get that debt paid off as soon as you can. You are making a good salary, and once the debt is paid off, you'll be in really good shape.


----------



## Taxsaver (Jun 7, 2009)

Thanks, LB71. I will do exactly as you said.


----------



## The_Number (Apr 3, 2009)

I'm in the same boat as Taxsaver in terms of starting to save for a house. I'm saving it in one of those high-yield online saving account, which is currently yielding just above 1%. I have also wondered if there could be a better place to put the money, but I'm not sure.

I have thought about using RRSP and/or TFSA for this, but I decided to use them for retirement, and the holdings in them are really not appropriate (= mostly stocks) for saving for a house. However, if you are not using RRSP/TFSA for retirement for the time being, I can see them as better options for safe investments (saving accounts, GICs, etc.).

Maybe I'm just being debt averse, but I have to agree with lb71 on not borrowing to fund RRSP. In order for the borrowing to make sense, you have to be convinced that the borrowed money will make more in returns than the interests. I can see how one can make this argument (as somebody did in another thread) for stocks, but if you have to stick to safe investment (because you cannot afford to lose the principal in this case), I can't imagine how you could get ahead by doing so.

@ Taxsaver: What is your time horizon? When are you thinking about buying? (Mine is about 4-5 years in the future.)

@ Everyone: Would anything other than the saving account make more sense? e.g., money market, GICs (esp. GIC laddering), high-quality bonds, or even junk bonds?
(When I opened my high-yield saving account, the interest rate was higher than that of most GICs. Now the interest rate so low, but I'm not sure if I want to lock the-higher-but-still-low interest rate with GICs when I think the interest rate will go up.)


----------



## cardhu (May 26, 2009)

Taxsaver ... perhaps some of us have muddied the waters for you, by using the word “refund” ... I usually try to avoid using that expression, because (a) it is wrong, and (b) it tends to perpetuate misunderstanding ... I only used the word refund upthread in response to another poster’s incorrect usage of the word. 

The truth is, RRSP contributions do not produce a “refund” ... what they do is produce a “deduction”, which in turn reduces your taxable income, and consequently lowers your tax owing ... you pay less tax, but whether or not there would be any “refund” depends entirely on whether, and by how much, you’ve overpaid during the year, though payroll withholdings, installments, and the like ... avoid overpaying in the first place, and you’ll never get a refund. 

There are times, and circumstances, when borrowing to fund an RRSP contribution can make sense ... in general, though, its not something you want to get into a habit of doing.


----------



## Taxsaver (Jun 7, 2009)

The_Number said:


> @ Taxsaver: What is your time horizon? When are you thinking about buying? (Mine is about 4-5 years in the future.)


5 years seems reasonable to me. I would like to earn as much money as possible here in Toronto, and buy a house in a small town where there is nature. Here in Toronto, it's buildings and asphalte. It's high paced and highly polluted (smog). In small towns you find houses at ridiculously low prices. The problem would be to find a job, though. People good with their hands (mechanics, carpenters, plumbers, electricians, etc.) can make a living pretty much anywhere. In my case. I'm not good at those things at all. I'll have to figure out something I'm good at other than taking stupid, customer service calls to which I seem to be stuck to right now!

I might move back to my hometown where my friends and family members can help me with the house repairs in exchange of pizza and beer.


----------



## Taxsaver (Jun 7, 2009)

Yes, Cardhu, I really got the impression I would get a cheque in a few weeks.  That's pretty stupid... I've just returned from the public library with 6 books on investments and RRSP's. I look forward to learning more on these subjects. One is RRSP's and RRIF's for Dummies (which I am). There is one that attracted my attention: Take Your Money And Run! (The story of a Canadian, tired of exhorbitant taxes, withdrew his money and RRSP's, left Canada, and now is living tax-free and happy ever after. I took it just to satisfy my curiosity.


----------



## lb71 (Apr 3, 2009)

The_Number said:


> @ Everyone: Would anything other than the saving account make more sense? e.g., money market, GICs (esp. GIC laddering), high-quality bonds, or even junk bonds?
> (When I opened my high-yield saving account, the interest rate was higher than that of most GICs. Now the interest rate so low, but I'm not sure if I want to lock the-higher-but-still-low interest rate with GICs when I think the interest rate will go up.)


Junk bonds are risky. For a short term savings platform, don't go there. 

GIC ladders are gimics. They publicize the final, highest rate, when the early years are low. Look the the average, annualized return to get a better idea of what the true rates are.

Daily interest rates are on the low end these days (although some institutions do pay 2%). You could consider short term GICs. One year rates can be found for 2%-2.25%. Great West has a two year rate of 2.5%. You can park them there short term if you think the daily rates will increase down the road. I had some money parked with ICICI once that I would turn over in 90 day GICs because the rates were slightly better than the daily.


----------



## Taxsaver (Jun 7, 2009)

lb71 said:


> Instead, work on paying off your current debt, and contribute to your RSP plan at work to maximize your employer's match. Check into your RPP plan as well, since it may allow your to contribute to it with additional employer matches. .


I will find out tomorrow about the RPP plan. If the employer matches my contributions the same way he does with my RRSP, then I will contribute for sure. He contributes to a maximum of 4%. I did the calculations, and it comes up to a contribution from his part of $65 bi-weekly. Do I include his contribution to my tax form? 




lb71 said:


> It would also be a good idea to get that LOC paid off before you purchase a house. Work on a plan to get that debt paid off as soon as you can. You are making a good salary, and once the debt is paid off, you'll be in really good shape.


If I respect my budget, I will be debt-free on February 9, 2010. In the event I get that second job, part-time, I will be debt-free on Dec 25, 2009. From then I'll be focusing on saving money for a house. I've always thought that I would be "all right" in my senior years. I realize that I will be 65 years in merely 20 years. I'm waking up!

I'm working on finding on roomate which would bring me an extra $350 a month.


----------

