Sometimes my clients ask me to help their adult children once they’ve graduated post-secondary, landed their stable career and are finally feeling the reward of a decent income and excess cash flow to spend – I mean save. 😉
The young couple sitting across from me held hands as they described how helpless they were feeling.
They really, really wanted to buy their first home.
But they couldn’t see how it was possible.
With steady jobs, good incomes, and a healthy balance in their savings account, they checked all the boxes!
But with current house prices and the high cost of borrowing, they didn’t know how to buy a home without being house poor.
Many young people today are in the same boat, unsure whether they will ever be able to afford to get into the real estate market.
Whether it makes sense - or is even possible - to buy a home depends on your unique situation. Beyond the obvious financial considerations like down payment, mortgage options and real estate conditions, personal values also come into play.
If your kid’s security of owning their own home is important, there may be other things they’re willing to compromise on.
The key is knowing what their options are, and the impact of each choice on their financial plan and future goals.
Which is exactly what we did for this young couple with their hearts set on putting down real estate roots.
When we took a closer look at their financial picture, we immediately identified several opportunities to help them reach their goal of home ownership.
First, they hadn’t opened a First Home Savings Account (FHSA).
The FHSA is a game changer for home buyers.
It allows young adults to make tax-deductible contributions up to $8,000 a year (to a maximum of $40,000), receive an income tax refund for the contribution, AND make tax-free withdrawals. There’s no minimum amount of time the contributions have to stay in the account, either. They can contribute and trigger the tax deduction, then withdraw the next day if it makes sense for their situation.
FHSA contribution room can be carried forward, which means that they could each make a substantial contribution this year - and receive a corresponding tax refund next spring.
They also had RRSP savings, so they could use the Home Buyers’ Plan to increase their down payment.
Under the HBP, they could each withdraw up to $35,000 tax-free to purchase a home for a total of up to $75,000. To give first time homebuyers more options, the 2024 Federal Budget has proposed to increase the limit to $60,000 per person.
Funds must be repaid to the RRSP over 15 years, following a 2 year grace period, with a minimum annual repayment of 1/15th of the total withdrawal.
When considering a withdrawal under the HBP, it’s critical to step back and look at the big picture. Consider the annual repayment, the impact of the withdrawal on your investment earning potential, and whether a smaller mortgage makes up for the hit to the RRSPs.
My clients’ daughter and her partner were relieved and hopeful when they realized that they had options. By providing them with concrete projections for several scenarios, they were able to see exactly what the future would look like based on their decisions.
Other couples might have made a different choice, but for these clients, home ownership was worth making the necessary compromises.
Fast forward a year, and not only are they happily living in their new home, their financial plan is designed around all their other wealth building goals is well under way.