Wednesday, January 9, 2008

Should you cash in your RSP to help buy a home - Part II

For the investor in you, this is not such a great deal. Zero percent growth on that withdrawn portion of your RRSP until you pay it back and can reinvest. The whole idea behind an RRSP is tax sheltered growth of funds for retirement. The benefit is of course that you avoid paying interest to the bank on that portion you would have had to borrow along with your mortgage. AND you also got a reduction of your income in the year of contribution. You’ll need to decide for yourself if this is compensating you adequately for having a poor investment inside your RRSP.

Generally, the answer is "no", it does not compensate you adequately. There is of course, one situation where this doesn't matter, and that's when you otherwise simply wouldn't have the funds to purchase the home. When you make less than a 20% downpayment on the purchase of a home you get dinged with a "mortgage insurance" premium. This can increase the effective interest rate on your mortgage by a couple of percent, depending on your credit history. Ask your mortgage broker to calculate for you what the effective yield on your mortgage will be. If it's significantly higher than the interest rate that you could earn by holding a bond in your RRSP then taking advantage of the Home Buyer Plan may be a good idea.

Lots to think about we know ... that's why you should sit down with a mortgage professional and your investment counsellor to have the numbers worked out for you before making a decision. Check out our recommended mortgage broker website Spencer Group Mortgages for more mortgage information and a simple application form. While you're there, sign up for the helpful newsletter for information on this and many more interesting and important topics whether you're a first time home buyer or a veteran looking for the latest information.

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