As mortgage interest rates have risen sharply in recent years, more and more people are wondering if they should avoid them by dipping into their savings to pay for their home. This is the case of Jacinthe* and André*.
The situation
Jacinthe, 65, and her husband André, 66, are retired and have just fallen in love with a new house. They intend to sell their current fully paid-off property worth approximately $600,000 and then withdraw $75,000 from their Tax-Free Savings Account (TFSA) whose funds are invested like all their 60% investments in fixed income securities and 40% in equities. The couple, who have no children, would then obtain a mortgage of $75,000. Thus, Jacinthe and André would have the $750,000 needed to purchase their new property. “We are thinking of taking a 30-year loan to have some room for maneuver, but repaying it in 10 years if all goes well,” says Jacinthe. We wonder if this is the most advantageous solution. »
Numbers
Jacinta, 65 years old
Registered retirement savings plan (RRSP): $59,000
Tax-Free Savings Account (TFSA): $79,000
Former employer’s pension plan: $21,800 annually
Quebec Pension Plan (QPP): $13,730 annually
Old Age Security (OAS) pension: $8,300 annually
Andrew, 66 years old
Registered Retirement Income Fund (RRIF): $466,000, withdrawal of $24,000 per year
TFSA: $82,000
QPP: $16,630 annually
SV: $8950 annually
Cost of living for the couple currently: $65,000 annually
Two cars paid for
No debt
High interest rates
While current interest rates for fixed mortgages are around 5.5% and 6%, taking out a mortgage loan is something to think about, says Simon Préfontaine, financial planner at Lafond Financial Services.
“With a portfolio composed of 40% equities and 60% fixed income securities, we can calculate that the couple’s annual return is around 3.5%, which is much less than what it will cost them “mortgage”, he illustrates.
In addition, he points out that the couple will have to pay the notary, which represents a sum of approximately $1,000, because, given that their loan would be only $75,000, the banks will not offer to pay part of it. these costs.
So, with a loan of $75,000, the payments over 30 years would be a little over $450 per month, and if Jacinthe and André repay their loan in 10 years, they would have to pay a little over $800 per month . To repay their mortgage in 10 years, they would have to add almost $10,000 to their cost of living for that same number of years.
PHOTO HUGO-SÉBASTIEN AUBERT, LA PRESSE ARCHIVES
Simon Préfontaine, financial planner at Lafond Financial Services
“By following the forecasting standards of the Quebec Institute of Financial Planning, I calculate that they should live on approximately $71,500 per year until the end of their days,” assesses Simon Préfontaine. However, for the first 10 years following the purchase of the house, they would need $75,000, so they would have to compensate either by reducing their expenses, or by drawing on their TFSA, or by taking more money out of their plan registered retirement savings account (RRSP), which would lead them to have to pay more tax. This is not ideal. »
The zero debt option
The first solution that the financial planner sees for Jacinthe and André would be to not get a mortgage loan and to withdraw the $150,000 they need from their TFSAs.
“Thus, they would have no interest to pay, no notary fees, an offer to purchase without mortgage approval conditions and they would not see their annual lifestyle increase because they would not have payment to make each month for their new house,” he explains.
On the other hand, withdrawing $150,000 from their TFSA would mean that only $11,000 would remain as an emergency fund.
“Probably the couple would not like to have so little, because it is always possible that something might happen with the new house, such as work having to be done earlier than expected, or even a hidden defect,” indicates Simon Préfontaine. . It is certain that they would not like to have to dip into their RRSPs for this type of unforeseen event. »
He would therefore suggest that they take out a mortgage line of credit when purchasing the house. “It would cost them very little per month if they keep it at zero, probably around $10, and it could even be free at some banks if they deposit a certain amount in their account,” he says.
Thus, the couple could carry out their project without going into debt, with the peace of mind that this guarantees.
The option of taking money out of the house
However, it must be considered that the couple does not have children and that they do not have the objective of leaving an inheritance to anyone. However, if Jacinthe and André pay cash for their house, they will find themselves having to give away the value of this property upon their death, which will have continued to grow.
“To avoid this situation, the couple could take out a mortgage loan, but not with the aim of paying it off as quickly as possible,” explains Simon Préfontaine. Their objective would rather be to benefit during their lifetime from the money that has been invested in the walls of their house. So they could take out a larger mortgage, say $150,000 or even $300,000, to pay it off as slowly as possible and be able to increase their annual expenses. »
To make their decision, the couple would benefit from thinking about their priorities.
“Jacinthe and André have several options and I advise them to take the time to sit down with a financial planner to look at their entire situation and the way they want to live their retirement,” says Simon Préfontaine. It will be their decision, but I think it would be more interesting to go completely in one direction or completely in the other, rather than trying to go in between by taking on a little debt and rushing to repay the loan. »
* Although the case highlighted in this section is real, the first names used are fictitious.