RRSP vs. saving for a home.

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There have been a lot of discussions on various blogs lately about the merits of saving for a RRSP vs. paying down a mortgage. As someone that has plans to purchase a family home in about 4-5 years, my situation is slightly different since I don't have a mortgage yet. While the home buyers plan will allow one to withdraw up to 20,000 to put towards the downpayment of a home is nice, I don't think it is realistically enough for someone living in Toronto.

A detached home in Toronto will cost at least 350K. With that in mind, I am trying to diligently save as much for a downpayment as possible. The ideal situation for me is to accumulate about 200K for a downpayment. I believe that this is very possible if I save about 20K a year and my rate of growth is at 6%.

So for my case, I think it makes sense to keep as much of my money outside of my RRSP as possible for now.

There are some that argue that I should do both - maximize my RRSP and use the remaining amount to put towards my downpayment. Unfortunately with this method, I don't think i will be able to come up with 200K for a downpayment as too much of my money will be tied up in my RRSP.

So basically my plan is to maximize my downpayment for my home. After I've purchased my home, I will then move forward on maximizing my RRSP and then use the tax refund and excess cash flow to pay down my mortgage.


What are your thoughts about this? Does it make sense? Help would be appreciated.

Comments

Anonymous said…
CD - why do you need $200k for a downpayment? If you can buy something for $350 to $400k then you wouldn't need more than 100k and that's only if you want 25%.

My suggestions: 1 Start looking sooner and get a good idea of what is out there - 2 Analyse the mortgage insurance and consider putting less than 25% down. That's what I did and it worked out very well for me - which of course doesn't mean it will work for you.
February 10, 2007 at 7:01 PM
torontoinvestor said…
Fair question - but doesn't it make sense to put down as large of a downpayment as possible? That way your monthly payments will be lower?

6 and 1/2 dozen?
February 10, 2007 at 10:22 PM
Gerry Power said…
Craziness dude. In one of your posts, you refer to a 20% return. A mortgage is going to set you back 6%. Why in the world would you put anything but the minimum towards your house, when you could be growing your money tax sheltered in your RRSP at 16% per year? This is a very serious issue - your future depends on it. Do the research, or get some serious tax advice!
February 22, 2007 at 10:34 PM
Anonymous said…
Either Way Your still hurting. Using RRSP's to save for a home is fine, but you still must pay back that RRSP in a certain number of years. In a perfect world, Teach your kids to not a buy a car until they have $10 Grand in RRSP's.

If you save and use your RRSP's. Even 20% of 300 would be 60,000. That's a lot to put back into RRSP's, with a morgage of $1000 or more per month.

So I think I agree with you. Save for your downpayment.
April 30, 2007 at 5:17 PM
Anonymous said…
I often advise my clients to try to do a combination of both strategies, contribute the most you can each year to your RRSP and then use the tax rebate to either invest back into your RRSPs or use it as a lump sum payment on your mortgage. But as stated, it isn't as simple as this as it really depends on many other factors such as the return on your investments, your marginal personal tax rate and your current mortgage rate.
http://blog.rhondasherwood.com/
http://www.itshermoney.com/
February 17, 2009 at 10:12 PM
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