Raphaëlle*, 33, single and in a good public sector job situation, wonders how to best use her savings accumulated since January 2021 while awaiting delivery of a condominium that has suffered multiple construction delays.
Posted at 6:00 am
Essentially, should she be using the roughly $20,000 in cash in her savings accounts and with her parents to increase her down payment and lower the cost of financing her condo mortgage?
Raphaëlle*, single, 33 years old
Financial assets :
– in a registered retirement savings plan (RRSP): $10,000 (after HBP withdrawal of $10,000 for condominium purchase)
— in a tax-exempt savings account (TFSA): $12,600
— in a pension plan: participants in the Quebec Public Sector RREGOP
— on savings accounts: $7,700
– Next primary residence: $215,000
– Next mortgage loan balance: Estimated $200,000 (CMHC loan insurance premium included)
– Auto loan balance: $17,000
labor income : $103,000
Key Annualized Payouts:
– Lifestyle related: Electricity: ~$37,000, estimated after moving into a condo: ~$55,000
— related to savings/investments: $11,700 (in payroll deductions for RRSPs, TFSAs and ongoing savings)
Or should Raphaëlle instead use this money to replenish her registered savings accounts (RRSP, TFSA), which remain underfunded while she preferred accumulating a down payment in anticipation of her first property purchase?
“By adding that $20,000, I could almost double my $22,000 down payment and reduce the final loan amount by the same amount when I take ownership of the condo,” Raphaëlle explains during an interview with The press.
“Also, increasing my down payment has reduced the cost of credit insurance with CMHC. Currently, that premium is estimated to be nearly $6,000, which is added to the principal amount of the mortgage loan. »
On the other hand, Raphaëlle is concerned that such use of her cash to reduce the initial and follow-up costs of her mortgage loan could affect her ability to cover anticipated budget overruns when she moves into her new condo.
“With the acquisition and moving-in costs, as well as the beginning of mortgage payments, condo fees and property taxes, I expect an increase in my lifestyle. [excluant l’épargne en REER et CELI] about 45%, about $55,000, explains Raphaëlle.
“If I’m using most of my cash to lower my mortgage financing costs, I’m concerned I’ll be a little tight on making those budget adjustments while maintaining my contributions to 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 brought to Louis Morneau, financial planner and financial security advisor at Aisance Gestion de Patrimoine, based in Brossard, a suburb of Montreal, for analysis and advice.
“Raphaëlle’s questions often come up with people making their first home purchase, whether it’s about using cash to increase the down payment on the mortgage or keeping a reserve in the face of additional housekeeping costs when acquiring and moving in,” notes Louis Morneau.
For this reason, he presents his analysis and advisory report in two phases: the “theoretical” aspect linked to the cost of CMHC loan insurance and the “practical” aspect linked to the short and medium-term budgetary considerations.
For the theoretical part, Louis Morneau immediately considers that “Raphaëlle can’t avoid CMHC loan insurance because she doesn’t have a 20% minimum down payment” on the $215,000 purchase price of his condo.
Based on this premise, Louis Morneau estimated the difference in his future mortgage payment between an insured loan totaling $199,000 with a down payment of $22,000 and an insured loan totaling $178,000 with an increased down payment of $42,000.
The result of this calculation: “The difference in a monthly payment is about $110 per month for his mortgage at a rate of 3.89%, which is locked in for three years. »
With this observation, Mr. Morneau suggests, “one would be tempted to conclude that Raphaëlle would be better off investing that $20,000 of available cash to increase her down payment.”
However, such a decision, made without considering the practical aspect of the condo move-in budget, could prove imprudent, warns Louis Morneau.
“When you become a homeowner and then move in, there are all sorts of costs that can add up quickly: property transfer taxes, moving expenses, buying appliances and other essential furniture, layout and decorating,” recalls Mr. Morneau.
In Raphaëlle’s case, “a savings reserve of $20,000 could be very useful in the short term.” “I recommend she keep it for at least a year after moving in, during which time she can adjust her lifestyle budget to her new status as a homeowner. »
And if that period passes without incident or major unforeseen events, according to Louis Morneau, “Raphaëlle will always be able to make additional payments on her mortgage or contribute to her RRSP or her TFSA. And without forgetting the start of the HBP minimum payments in two years [retrait pour accès à la propriété de 10 000 $] deposited into 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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