How to pay for the purchase of a house when you are at the start of retirement? By mortgage or cash, by drawing on your retirement savings?
The situation
How to pay for the purchase of a house when you are at the start of retirement? By mortgage or cash, by drawing on your retirement savings?
These are the questions of Monique*, 62, who is seeking advice after a recent marital separation and the resale of the couple’s house.
Having since moved to rental accommodation, Monique wants to buy a house in order to move in with her “new single lifestyle” and be better prepared to maintain family activities with her children and grandchildren.
At this time, Monique has targeted the purchase of a house under construction at an expected cost of $430,000. She wants to complete this purchase by the end of the year, in order to be able to move into this new house in spring 2025.
However, as a retired annuitant, and recently single in personal finance, Monique wonders about financial planning for this house purchase.
“I have a retirement plan annuity income (approx. $44,000 from the Quebec public sector RREGOP) which is secure in the long term, and expected to grow with the start of the Quebec RRQ and the federal PSV at age 65 . But this annuity income is relatively modest depending on my new lifestyle as a single person (approx. $36,000 per year) with which I still have to adjust, indicates Monique during an interview with The Press.
“Moreover, I was able to accumulate a good value of financial assets in my personal savings accounts ($200,000 in RRSP, $185,000 in TFSA and approximately $330,000 in non-registered account) of which I could perhaps be used to reduce the amount of a new mortgage loan. »
In this context, Monique is seeking advice on financing her purchase of a house based on her budgetary situation and her retirement annuity financial planning.
“Which would be more beneficial: taking out a new mortgage with a smaller down payment from my savings accounts, or minimizing a new mortgage by making a large down payment by drawing more from my savings accounts? savings? »
Monique’s situation and questions were submitted for advisory analysis to Julie Tremblay, who is a financial planner and financial security advisor at IG Gestion de Patrimoine, in the Quebec region.
The numbers
Monique*, 62 years old
Retirement annuitant, single, without dependents
Financial assets
- in a registered retirement savings plan (RRSP): $200,000
- in a tax-free savings account (TFSA): $185,000
- in non-registered investment savings account: $330,000
Non-financial assets
- recent vehicle (2024): approximately $40,000
No debt liabilities
Current budget
Retirement annuity income: $44,000
Main annualized disbursements: approximately $36,000
(around $20,000 housing related, around $16,000 lifestyle related)
The advice
At first glance, Julie Tremblay notes favorably that “Monique’s financial situation allows her to consider various scenarios for her purchase of a new house. She must now choose the scenario that is most comfortable for her, both on a personal and family level and in terms of her personal finances.”
“At 62, Monique could enjoy this new property for several years by choosing a house well adapted to a lifestyle for a person of her age, while foreseeing the evolution of her needs and her abilities in terms of autonomy residential”, recalls Mme Tremblay.
That said, what are the possible scenarios?
All cash, no mortgage
Monique pays cash for the purchase of her new house (estimated at $440,000, including transaction fees) by disbursing the entirety of her non-registered investment savings account (approx. $330,000) and obtaining the rest by withdrawing $110,000 from his tax-free savings account (TFSA).
“The main advantage of this scenario for Monique is the absence of financial or budgetary stress linked to adding mortgage payments to her new budget as a single retiree,” indicates financial planner Julie Tremblay.
PHOTO ÉRICK LABBÉ, LE SOLEIL ARCHIVES
Julie Tremblay, financial planner and financial security advisor, IG Wealth Management
In return, on a tax level, “Monique will have to pay attention to the taxable capital gain which could be generated by the resale of all of her investments in a non-registered account”, warns Mme Tremblay.
She therefore suggests that Monique consult a tax accountant in order to consider the resale of her investments spread over two consecutive financial years, with the aim of limiting her taxable income from one year to the next and avoiding an overcharge in taxes.
Small cash, big mortgage
Monique buys a house with a 20% down payment (approx. $88,000, above the minimum loan insurance threshold) and takes out a mortgage of $352,000 at an estimated interest rate of 4% d ‘a few months from now.
“Monique would then have a mortgage payment of $1,810 per month (approx. $21,800 per year) and new property taxes that would increase her housing spending budget above its current amount of $20,000 per year,” reports Julie Tremblay.
Then, if Monique needs to fill a gap between her retirement annuity income and her new lifestyle budget, Mme Tremblay suggests that he consider withdrawals from his non-registered investment savings account.
If they are well balanced according to taxable capital gains upon the resale of investments, these withdrawals from a non-registered account would have “a minimal consequence on the taxation of Monique’s retirement income”, anticipates Mme Tremblay.
Also, in long-term financial planning, this scenario of minimum down payment and large mortgage loan could encourage the accumulation of a good value of financial assets in retirement savings accounts until a very advanced age.
Half cash, half mortgage
Monique buys a house with a down payment equivalent to 50% of the purchase costs (approx. $220,000). She also takes out a mortgage loan for a similar amount at an estimated interest rate of 4% in a few months.
“Monique would then have a mortgage payment of around $1,130 per month (approx. $13,600 per year) and new property taxes whose total amount would be close to her current budget for housing expenses (approx. 20,000 $ per year),” explains financial planner Julie Tremblay.
As for her down payment of $220,000, Monique would obtain it by disbursing her TFSA account (approximately $185,000 accessible without tax impact) and making up the rest with a minimum withdrawal made in her RRSP account or in her savings account. unregistered investment savings.
“The choice of disbursement between these two accounts will depend on the tax situation of all of Monique’s retirement income at that time (pension plan, Quebec and federal public pensions, investment income, etc.), points out Mme Tremblay.
“It may be beneficial for Monique to combine withdrawals from her RRSP account and her non-registered investment savings account in order to maintain her taxable income at an optimal level. »
With this scenario, concludes Julie Tremblay, Monique would have the advantage of relative stability in her annual budget for housing-related expenses. She could also maintain a good level of financial assets in retirement savings for her foreseeable needs until a very advanced age.
* Although the case highlighted in this section is real, the first names used are fictitious.