Downpayment or Investments?

[ickyflex]

Got a new build coming up due in November so I'm looking to get an answer from those who may be familiar with what the best options are.

All my capital is currently invested + the 25g cash in RRSP for First Time Buyer Credit.

I can sustain the mortgage without dipping into my investments, but I was curious what would be the best route to go.

A) Dump everything into down payment and do nothing after
B) Dump half into down payment and leave the 50% invested in equities
C) Dump everything into down payment and use HELOC to re-enter investment positions (provided they pay a dividend of which you can write off interest) (well 85% of the positions since you can't take 100% out)

Feel free to PM me if needed

[mazdavirgin]

Liquidity has a lot of intrinsic value on it's own. Means you're not screwed if you lose your job or life circumstances happen. Trying to move an asset like real estate in a bad market can be a very lengthy ordeal. I frankly cannot see any reason why you would want to put all your eggs in one basket.

Put the minimum you can down and still have reasonable month to month payments. Keep the rest invested into something liquid like equities or whatnot.

[Strider]

Originally posted by ickyflex
Got a new build coming up due in November so I'm looking to get an answer from those who may be familiar with what the best options are.

All my capital is currently invested + the 25g cash in RRSP for First Time Buyer Credit.

I can sustain the mortgage without dipping into my investments, but I was curious what would be the best route to go.

A) Dump everything into down payment and do nothing after
B) Dump half into down payment and leave the 50% invested in equities
C) Dump everything into down payment and use HELOC to re-enter investment positions (provided they pay a dividend of which you can write off interest) (well 85% of the positions since you can't take 100% out)

Feel free to PM me if needed

You lost me at $25k in RRSP for Home Buyer's Plan. Are you saying you took (or are planning to take) $25k out of a sheltered account (RRSP) to put into unsheltered?

Nobody else can really answer for you, because the answer depends on your own outlook on the markets (also how well you pick investments) and your risk tolerance.

A is the safe approach (guaranteed after-tax return equal to your mortgage rate), C would be higher risk higher reward approach, B doesn't make sense (instead, you'd put 100% in and HELOC 50% back out to invest). I would only consider C if you've already maximized your RRSP and TFSA and have >20% down to avoid CMHC.

[ercchry]

Get something like a manulife one account and do option C, no point in paying more interest than you have to

[Sugarphreak]

...

[Xtrema]

Originally posted by ickyflex
I can sustain the mortgage without dipping into my investments

I see very little reason to put $ toward a house right now since mortgage rate is all time low.

If you don't have to liquidate in order to buy your house, don't. Keep investing.

[roopi]

Take the $25k out via RSP HBP for sure. If you are comfortable investing then I would get a Heloc and use the money to invest so you can write off part of it as you said.

Even if you don't need the RSP money for down-payment withdraw it and put it towards your house. Then just recontribute to get the tax credit (assuming you have the room). You only need to pay it back over 15 years I think.

[Disoblige]

Originally posted by roopi

Even if you don't need the RSP money for down-payment withdraw it and put it towards your house. Then just recontribute to get the tax credit (assuming you have the room). You only need to pay it back over 15 years I think.

What do you mean re-contribute it to get your tax credit? The $ you recontribute through RRSP doesn't count towards tax credit, does it? I thought no, because on your taxes it asks you how much you are repaying and that doesn't count towards lowering your income.

[Strider]

Originally posted by ercchry
Get something like a manulife one account and do option C, no point in paying more interest than you have to

When I was shopping, the interest rates on M1 were horrific. Better off to do separate mortgage and HELOC (unless he needs readvanceable).

Originally posted by roopi
Take the $25k out via RSP HBP for sure. If you are comfortable investing then I would get a Heloc and use the money to invest so you can write off part of it as you said.

He'll still pay taxes after writing off the interest on the $25k borrowed back out to invest, so how is this better than leaving it in the RRSP where returns aren't taxed?

Originally posted by Disoblige
What do you mean re-contribute it to get your tax credit? The $ you recontribute through RRSP doesn't count towards tax credit, does it? I thought no, because on your taxes it asks you how much you are repaying and that doesn't count towards lowering your income.

When you make a contribution after taking out HBP, you designate how much is contribution and how much is repayment. So if OP doesn't regularly max out his RRSPs, he could take out the $25k and put it all back next year, designating 1/15 ($1666) as repayment and $23,333 as new contribution (up to his deduction limit of course), thus triggering a tax credit on the following year income.

[tonytiger55]

ickyflex,
It depends on your goals and understanding your financial profile.

By that I mean what are your goals for the next five years, ten years or even 15/20 years?

This has a bearing on whether you should take money out of your investments. Do you have a emergency fund, what are your expenses, what is the age of your vehicle, are you married (kids, etc), do you have funds for a planned life event (Marriage, kids, mid life crisis, divorce etc)..?

Your financial profile has a major impact on the choice of A B C. So its hard to say.

Ideally you want to put at least 20% down or more on a property. Then go from there.

Your investments should be planned for 5years+ plus. Anything less then you are at a high risk of market fluctuation. But again, this depends on your goals and risk tolerance.
Borrowing to invest I would not personally recommend, unless you really know what the hell you are doing in the financial markets.

I would strongly recommend speaking with a financial planner. If you sit down and plan this out with one, its much better and helps you navigate market and life's ups and down.

[Buster]

rent

[ercchry]

Originally posted by Strider


When I was shopping, the interest rates on M1 were horrific. Better off to do separate mortgage and HELOC (unless he needs readvanceable).

like being the key word, lots of different products, MCAP has a decent one, think the heloc portion is P+0.5

Just easier to use manulife's as the example since it's so well known

[zhao]

Originally posted by tonytiger55
ickyflex,
It depends on your goals and understanding your financial profile.

By that I mean what are your goals for the next five years, ten years or even 15/20 years?

This has a bearing on whether you should take money out of your investments. Do you have a emergency fund, what are your expenses, what is the age of your vehicle, are you married (kids, etc), do you have funds for a planned life event (Marriage, kids, mid life crisis, divorce etc)..?

Your financial profile has a major impact on the choice of A B C. So its hard to say.

Ideally you want to put at least 20% down or more on a property. Then go from there.

Your investments should be planned for 5years+ plus. Anything less then you are at a high risk of market fluctuation. But again, this depends on your goals and risk tolerance.
Borrowing to invest I would not personally recommend, unless you really know what the hell you are doing in the financial markets.

I would strongly recommend speaking with a financial planner. If you sit down and plan this out with one, its much better and helps you navigate market and life's ups and down.

This..... except for telling him to put down 20% or more (That may or may not be retarded advice for his situation).

OP: Everyone's financial goals are different, and talking to someone who can help you figure out where you want to be and how you want to get there is better than taking the advice of random people on the internet. The guy saying do XYZ may have polar opposite goals or opportunities to you.

But to add to the crap pile of advice that may or may not be terrible advice for you (personally I like mazdavirgin's advice as well):

- I'd do 20% down and not a dime more (gotta avoid wasting money on CMHC insurance) if you plan to move again soon. Minimum downpayment if this is your forever home.
- I'd also empty your 25k RRSP for the downpayment (assuming you have room in your tfsa)
- I'd put every dime into a TFSA and go with investments that are as high risk as you can stomach while you are young.
- any spill over I'd put back into the RRSP

That is what is ideal for me, as the money in a TFSA work far better for me IMO. (IMO in general a TFSA is a better retirement vehicle more often then not. The 2 major upsides to a RRSP over a TFSA are 1) your contributing at your marginal tax rate which is high (or at least it is for the beyond ballers), and you will be withdrawing at your average tax rate which will likely be far far lower, and 2) people have poor financial willpower and will be tempted to withdraw from tfsas. Much harder to do that from RRSPs).

The upside to a TFSA is its non taxable income when you pull it out, which when you are retired affects how much government support you get. Make zero taxable income and right now there are perks. Bring in lots of income from your rrsps or pension, and you'll recieve less from the government. Also, when people contribute to a RRSP they do this: Contribute 10g. Get 3g back, spend 3g on some bullshit (That right there makes a TFSA a better investment). It is far easier to pull out and put back in case of an emergency. Tax rates of the future aren't guaranteed either, but rarely do tax rates go down. If we are taxed more in the future on income and your taxable income remains constant then RRSPs make less sense vs using a TFSA.



If you make a fortune and are upper tax bracket, I'd do something different though.

[KappaSigma]

Originally posted by Strider


When I was shopping, the interest rates on M1 were horrific. Better off to do separate mortgage and HELOC (unless he needs readvanceable).



He'll still pay taxes after writing off the interest on the $25k borrowed back out to invest, so how is this better than leaving it in the RRSP where returns aren't taxed?



When you make a contribution after taking out HBP, you designate how much is contribution and how much is repayment. So if OP doesn't regularly max out his RRSPs, he could take out the $25k and put it all back next year, designating 1/15 ($1666) as repayment and $23,333 as new contribution (up to his deduction limit of course), thus triggering a tax credit on the following year income.

Best to call manulife as they typically beats whats posted. I have a manulife one account and just did 5 year fixed 2.54%

[Feruk]

There are only two numbers I see as significant:
a) 5% down
b) 20% down

These are the only two options I'd even look at. Option "a" is nice because you can use the other 15% to invest, which will more than make up CMHC fees. The suggestion that you're "wasting money" on CMHC fees is nonsense. It's an insurance policy for someone else that allows you to have more money to invest with (or as a rainy day fund). Only downside is these mortgages are "recourse" meaning they can go after other assets if you default. Option "b" is a better option if you ever worry about defaulting as the mortgages are "no recourse" meaning you can walk away from the house and they can't target other assets.

I think interest rates will bring down housing prices significantly. Because of that, I've chose option "b." Your opinion may be different.

5% or 20%. No other number makes any sense.

Originally posted by Buster
rent

Best answer.

Originally posted by Strider
A is the safe approach (guaranteed after-tax return equal to your mortgage rate)

False. With interest rates likely to rise, the underlying assumption that home prices will always rise is likely to be untrue.

[ercchry]

Most 20% down are still insurable on the backside, if you want true no recourse just purchase something for over $1m

High ratio gets you about 10 point better rates too

[zhao]

Originally posted by Feruk
[B]The suggestion that you're "wasting money" on CMHC fees is nonsense.

Not true for a lot of people.

Your average person doesn't normally have money to invest, and wont invest or wont go with an investment you are thinking of even if they did; they'll spend that money on crap. Your average person 'likes' being in debt up to their eyeballs and doesn't understand anything about investing as well. Your average first time home buyer is likely not buying a home they will live in forever either.

....People dont even understand buying a car and how the financing/leasing on that works.

All that translates into saving 10g or whatever on CMHC fees might be their best bang for buck investment ever on that 15% lump sum of their purchase price.

Even if they are somewhat investment savy, they can probably only bank on getting a 6% return on a mutual fund after MER fees. That means if they sold their home in the first 3-4 years, they likely just lost money. If its a period of recession, their mutual fund is likely not even doing 6%. In that respect, paying CMHC fees is wasting money.

The math is: are you pretty sure you can make more money on that amount than the CMHC fees before you have to sell your home? If you can, 5%, if you can't, 20%.

[OTown]

Are you able to pay the 20% down without dipping in investments? If not; I would highly encourage you reaching that plateau before doing any investing due to CMHC fees. I doubt you will see returns in investment close to the thousands of dollars it will cost to cover the CMHC fees (which just recently went up, BTW). Theres no sense of losing money on such fees if you have the capital to avoid it.

I personally did the RRPS HBP and don't regret it one bit. I basically see it as a one time interest-free loan I gave to myself to save interest in the first few years of the mortgage. Just make sure you have the sufficient funds to reallocate to it prior to the 15 year limit or else you will be in a world of tax-pain.

[Feruk]

Originally posted by zhao
Your average person doesn't normally have money to invest, and wont invest or wont go with an investment you are thinking of even if they did; they'll spend that money on crap. Your average person 'likes' being in debt up to their eyeballs and doesn't understand anything about investing as well. Your average first time home buyer is likely not buying a home they will live in forever either.

If you've saved up 20% for a down payment and can choose what to put down on a house, you're likely good with your money.

Originally posted by zhao
Even if they are somewhat investment savy, they can probably only bank on getting a 6% return on a mutual fund after MER fees. That means if they sold their home in the first 3-4 years, they likely just lost money. If its a period of recession, their mutual fund is likely not even doing 6%. In that respect, paying CMHC fees is wasting money.

1) 6% is about the average across a long period of time. That period would include booms as well as busts. In a boom year, you'll make way more than 6%. The 6% is not a representation of good years.
2) Unless there's a really hot market, you'll most likely lose money on selling a house in 3-4 years regardless of what the down payment is.

Originally posted by zhao
The math is: are you pretty sure you can make more money on that amount than the CMHC fees before you have to sell your home? If you can, 5%, if you can't, 20%.

Agreed on that.

[Strider]

Originally posted by Feruk
False. With interest rates likely to rise, the underlying assumption that home prices will always rise is likely to be untrue.

OP has already bought a house, he's already committed to the risk attached to the underlying asset and owes the bank principal and interest. Unless house prices drop >20% and he walks away from his house, paying his mtg will be the highest guaranteed return.