Advice for First Time Home Buyers
By James E. Sellars
One of the great challenges in life is turning the corner on youthful spending
and beginning the process of careful and quiet accumulation of wealth. It most often happens shortly after a couple makes that important decision to live and work together for a shared future dream—creating a family together. One of the very first thoughts after the plan has been voiced is, “We will have to see if we can buy a home.” About this time it would be wise if more people consulted with a “Money Man,” since there are a lot of interesting but little understood financial strategies that can enhance the success of this first serious step toward wealth creation.
Your local Certified Financial Planner (CFP) would remind you of the available program through the RRSP rules and regulations that allows first-time homeowners to take up to $20,000 from their RRSP tax-free and use it as a down payment. The Government of Canada has had this program on the books for quite awhile, and it offers some very good financial planning benefits for the young couple, who are just beginning the journey together. There is real benefit for most new couples to contribute to an RRSP for a few years until a nest egg is accumulated that can be used as a down payment on the first home they buy, since they would save a substantial amount of taxes in the process of contributing to the RRSP.
The Home Buyer’s Plan can be reviewed at the Canada Revenue Agency’s website, www.cra.gc.ca, but essentially it allows a tax-free withdrawal of up to $20,000 from your RRSP to be used to buy or build a new “qualified” home. It must be repaid to your RRSP over the subsequent 15 years, but it allows the new homeowner access to money they have already received a tax benefit for, to be used as a down payment. Is it necessary to make a down payment these days with banks offering 100% financing on homes, you may ask?
That is another thing a CFP will encourage—prudence. Our grandparents often suggested, “Neither a lender nor a borrower be,” and although that doesn’t make much sense in our modern world what with the need to finance educations, our home and probably our car, living within ones means is the key to real wealth creation. Every person you ever met who became wealthy did it with “other people’s money,” and spent less than they earned. In spite of recent offerings of 40 year mortgages, designed to allow people to buy an expensive property, buying a modest home is more prudent than committing to a massive long-term debt, for most young couples. Buying a home that you can afford is a clever way to securely accumulate wealth. Each month as you make a payment on the mortgage, part of the payment should be on the principal repayment, building equity in the home for your future. Did you know that any money we gather from the sale of our principal residence is tax-free?
There are no quick ways to make wealth, it was the turtle that won the race, and making money is the same. Now tax is another matter. It is pernicious in its continuous drain on wealth accumulation efforts and that is why it is so necessary to have the assistance of a professional who can guide you in tax avoidance strategies, like regular contributions to an RRSP. Additional techniques to reduce tax and even make your mortgage tax deductible are available to the homeowner who has a relationship with a CFP. He will know how to implement the Smith Manoeuvre for example, which is a strategy capable of making the costs associated with your home a deduction on your tax return just like an RRSP contribution, only with no money out of pocket!
For more information about this and other wealth creation techniques take a look at the website www.wealthmanagementcanada.com or contact your local CFP for guidance; and have a happy and prosperous life.
James E Sellars, B.A. (econ), CFP, is a Tax Accountant and Certified Financial Planner for Keybase Financial Group in Moncton, NB. For more information on making a Canadian lifestyle change with all the steps and requirements explained, visit his website at www.wealthmanagementcanada.com.
