Raphaëlle*, 33, single and in a good job situation in the public sector, wonders about the best use of the savings she has accumulated since January 2021, while she awaits the delivery of a condo suffered several construction delays.
Posted at 6:00 a.m.
The situation
Essentially, should she use the approximately $20,000 in cash available in her savings accounts and with her parents to increase her down payment and reduce the cost of mortgage financing for her condo?
Numbers
Raphaëlle*, single, 33 years old
Financial assets :
– in a registered retirement savings plan (RRSP): $10,000 (after HBP withdrawal of $10,000 for the purchase of a condo)
— in a tax-free savings account (TFSA): $12,600
— in a pension plan: participant in the RREGOP of the Québec public sector
— in savings accounts: $7,700
Non-financial assets:
– next principal residence: $215,000
Passive :
– balance of the next mortgage loan: expected at $200,000 (CMHC loan insurance premium included)
– car loan balance: $17,000
employment income : $103,000
Main annualized disbursements:
– related to lifestyle: current: approx. $37,000, estimated after moving into a condo: approx. $55,000
— related to savings/investment: $11,700 (in payroll deductions for RRSPs, TFSAs and current savings)
Or should Raphaëlle instead use this cash to replenish her registered savings accounts (RRSP, TFSA) which remain underfunded while she favored the accumulation of a down payment in anticipation of her first real estate purchase?
“By adding this $20,000, I could almost double my down payment of $22,000 and reduce the final amount of the loan by the same amount when I take possession of the condo,” explains Raphaëlle, during an interview with The Press.
“In addition, by increasing my down payment, I could reduce the cost of loan insurance with CMHC. For the moment, this premium is estimated at nearly $6,000, which is added to the base amount of the mortgage loan. »
On the other hand, Raphaëlle is concerned that such use of her liquid assets to reduce the initial amount and the subsequent costs of her mortgage loan could harm her ability to meet the foreseeable budgetary cost overruns when she moves into her new condo.
“With the costs of taking possession and moving in, as well as the start of mortgage payments, condo fees and property taxes, I anticipate an increase in my lifestyle. [excluant l’épargne en REER et CELI] around 45%, around $55,000, explains Raphaëlle.
“If I use most of my cash to reduce my mortgage financing costs, I’m afraid I’ll find myself a bit tight to make these budget adjustments while maintaining my contributions in registered savings accounts like RRSPs and TFSAs. . »
In short, Raphaëlle asks, how do you choose between these options, while taking into account financial planning and personal tax considerations?
Raphaëlle’s situation and questions were submitted for analysis and advice to Louis Morneau, who is a financial planner and financial security advisor at the firm Aisance Gestion de patrimoine, based in Brossard, a suburb of Montreal.
Advice
“Raphaëlle’s questions often come up among people who are making their first residential purchase, between using cash to increase the down payment on the mortgage, or to maintain a reserve in the face of additional budgetary costs when taking possession and moving in,” notes Louis Morneau.
This is why he presents his analysis and advisory report in two stages: the “theoretical” aspect, linked to the costs of CMHC loan insurance, and the “practical” aspect, linked to the budgetary considerations to be short and medium term.
PHOTO ROBERT SKINNER, LA PRESSE ARCHIVES
Louis Morneau, financial planner and financial security advisor at Aisance Gestion de patrimoine
For the theoretical aspect, Louis Morneau immediately considers that “Raphaëlle cannot avoid CMHC loan insurance since she does not have a minimum down payment of 20%” of the purchase amount of $215,000 from his condo.
Based on this premise, Louis Morneau estimated the difference on his future mortgage payment between an insured loan for a total amount of $199,000 with the down payment maintained at $22,000, and an insured loan for a total amount of $178,000. with a down payment increased to $42,000.
The result of this calculation: “The difference on a monthly payment is about $110 per month on his mortgage at the rate of 3.89% fixed for three years. »
With this observation, suggests Mr. Morneau, “one would be tempted to deduce that Raphaëlle would do better to invest these $20,000 of available cash to increase her down payment”.
However, such a decision taken without taking into account the practical aspect of the budget for moving into the condo could prove to be imprudent, warns Louis Morneau.
“When you become a homeowner and then move in, there are all kinds of costs that can add up quickly: transfer taxes, moving costs, purchase of appliances and other essential furniture, layout and decoration,” recalls Mr. Morneau.
In Raphaëlle’s case, “a savings reserve of $20,000 could be very useful in the short term”. “I recommend that she keep it for at least a year after moving in, the time she can adjust her lifestyle budget to her new status as homeowner. »
And if this period passes without incident or major unforeseen event, indicates Louis Morneau, “it will always be possible for Raphaëlle to make additional payments on her mortgage or to contribute to her RRSP or her TFSA. And without forgetting the start in two years of the minimum HBP payments [retrait pour accès à la propriété de 10 000 $] made in his RRSP account for the down payment on his condo purchase”.
* Although the case highlighted in this section is real, the first name used is fictitious.
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