Saving for a house - 3 year timeframe + househack questions

[PoutineLover]

I'm looking for some advice on the most optimal way to save for a down payment in Canada. I would like to buy a duplex or triplex in about three years with my partner. Our combined gross income is about $80,000, and combined we should be able to save (at least) 20k per year towards this goal. I currently have a TFSA and a DC pension at work, and he is starting almost from scratch. I have been investing in my TFSA but I don't think I should use that for the down payment since I think it's more valuable to keep it until retirement (Correct me if I'm wrong).
In three years we can save 60k, and my thinking was that we could put most of that in our RRSPs and then withdraw 50k using the homebuyer's plan. This would save us a bit on taxes while we save (although we are in a low bracket already), and we can repay it over 15 years. The rest can be in a TFSA or a regular account (maybe some in cash as we get closer to the actual purchase date). We are also expecting some help from our parents, maybe 10-20k or so but I don't want to count too much on that. Does that plan seem sound? Is there anything else I should be considering?
My next question is, how should I invest the money? Since it's a relatively short time frame it shouldn't be all stocks, but it seems like a waste to keep it in GICs or cash. I am using Questrade and hold VGRO in my TFSA, would either VCNS or VBAL be a good choice?
Finally, I am wondering how banks take into account rental income when offering mortages. For example, using a 75k downpayment and $80,000 income I qualify for a 350k home. If I plan on renting out an apartment for say 1k a month, would the bank allow me to borrow more for a more expensive house? Would I add expected rent to my income? I would appreciate a bit of insight as I start planning this process.

[The Fake Cheap]

Hi PoutineLover.

My advice would be to settle for the GICs and savings accounts, I highly recommend avoiding stocks with only a 3 year time frame.  You can probably do better than typical savings account interest rates and GIC rates by taking advantage of special offers at other institutions, you could perhaps get 2-3% for a year on your 20K. 

As for counting your expected rental income, I _think_ the bank will allow you to use 50-75% of it as income.  It's been a while since I last worked at a bank.

For the Homebuyers plan, I would be a bit on the fence on with your and your partner's current income, assuming you each make 40K/year.  As you say, you are not really in a high tax bracket, so there isn't a ton of tax savings and once you use this RRSP room for the HBP, it does not get restored.  I would say you are just as well off to use your TFSA, where you're money will grow tax free, and the TFSA contribution room will be restored when you withdraw the funds for your downpayment.  This will also keep the RRSP room available for when your incomes become higher.  I would like to hear others chime in with their thoughts. 

[Prairie Stash]

I've always been torn about the HBP. It accelerates savings; if you reinvest the refunds you can hit the target 25-30% faster. It could shave a year off the savings timeline. On the back end you have to put the money back which can pe painful.

TFSA is the place to save outside the RRSP, until you run out of TFSA room do not use a non-registered account (a TFSA is always better). You can pull it out and put it back in the following calendar year. It was intended for people to use to purchase houses, might as well use it.

Do not invest in stocks if you need the money at a specific time. Stocks are a roller coaster ride, you get massive ups and downs, you don't want to coincide with a down. The easy route is something like Tangerines TFSA, it's boring but stable.

in 2007 they considered my rental income at 50% at RBC. So a place that rents for $1000/month ($12k/year) effectively adds $6000 to your annual income. It was a suite within my house, owner occupied. 

[PoutineLover]

Cool, this is good info. I should calculate exactly how much I'd save on taxes with the rrsp. Shouldn't be too hard to repay it, we dont want to stretch ourselves too much on the mortgage anyway if we can help it. I'm not sure I understand the part about losing rrsp contribution room by using the hbp, if I have to repay it anyway I've only lost the compounding right? Or am I missing something?

[The Fake Cheap]

Cool, this is good info. I should calculate exactly how much I'd save on taxes with the rrsp. Shouldn't be too hard to repay it, we dont want to stretch ourselves too much on the mortgage anyway if we can help it. I'm not sure I understand the part about losing rrsp contribution room by using the hbp, if I have to repay it anyway I've only lost the compounding right? Or am I missing something?

If you use the HBP now, at a salary of 40K annually your marginal tax rate will be fairly low, the exact amount will depend on the province you are in, since all provinces have different tax rates and different tax brackets.  Actually now that I think more about it, you said you would be putting in 20k/year, so you would get back a fairly small amount since your income would only be 40K.  As per this simpletax.ca calcualtor, using Ontario, with a 40K income you would pay $7,972 in fed and prov taxes (this is super basic ignoring other factors but it gets the point across) if you then make a 20K RRSP contribtion you still pay $3,512 in income tax, so the 20K RRSP contribution gave you about $4,500 back.  Now if you were making 60K, you would pay $14,352 in income tax, with that same 20K RRSP contribution you still pay $8,756, so you get about $5,500 back, an extra $1,000. 


While the difference isn't as large as I thought it would be, it is still significant, especially considering this scenario each year for 3 years.  Back to my original point, if you use this 60K in room now, (20K/year for 3 years) you won't have that 60K of contributions room to use in the future when you are earning more money.  When you are repaying the HBP, you don't get to claim that amount as an RRSP deduction on that years income tax as it was already claimed when you originally made the contribution.  Regarding the compounding, in this case you are either pulling it out of an RRSP or a TFSA so you are missing future compounding either way so it's moot point.

[Prairie Stash]

Sometimes people focus too much on RRSP refunds. A $4500 refund is more valuable today then a $5500 refund in 5 years (assuming 4% growth rates). For sure its better then a $5500 return in 10 years, if you put the money into a GIC...

As Fake cheap points out; using the RRSP and HBP plan and the numbers provided you can save $50k in 2 years (20+20+4.5+4.5=49...close enough). In a TFSA that would take 2.5 years. What's 6 months of rent worth? Could the foregone rent make up the differnece between refunds?

I'm not sure that was their point, but that's the numbers they used.

[PoutineLover]

So according to an online calculator, I would get back about $2750 if I contribute 10k to my RRSP. My partner would do the same, so combined we'd be getting back $5500, which we would also put towards the down payment. To me, it seems like using the home buyers plan would be like getting an extra 27.5% return on our money, but with the potential downside of having less room to use later on if we end up making more money.
Our rent is currently super cheap, if we have to move it'll slow down our savings plan but we are hoping to save up enough to buy so that when we do move it'll be into our own place. I have 23k of room to use now, and I'll get another 5k of room each year (since my pension counts against it as well), so I have a finite amount of time (3 years I think) to use this plan. Once I run out of RRSP contribution room or get above 25k I'll switch back to the TFSA instead.
Basically, it seems like the HBP is the financially optimal way to do it right now, at current incomes, using the assumption that I won't be making more money in the future. Since I can't be sure that I will make more money, I think I'll start the plan for now, and re-evaluate if I end up landing another job. Does that make sense?

[Lews Therin]

Howdy.

Your tax bracket is large enough that you'd have to make significantly more money before your RRSP would be more effective. Your logic is sound, and by paying into RRSP as much as possible, and continuing to do so non-stop until the RRSP is full, and then switching over to the TFSA will be very cost-effective.

The use of the HBP is by far the best way, since you get the tax savings of RRSP, and you get to have reduced tax liability (since your RRSP isn't growing as far as it would have, which means less money that gets taxed as income when you take it out). Can you fill the RRSP and TFSA, or is it a either/or scenario?

[PoutineLover]

I think that the most I can realistically plan to save right now is 10k-13k a year (depends if we travel or get a car too), so with the room I have left in my TFSA and my RRSPs I wouldn't be filling them both completely in the next 3 years, but maybe the next 5. But then of course I'd have to refill them anyway after the down payment.
Question about refilling though: say I only have to put in $1,666 a year to refill 25k over 15 years. Can contributions above that qualify for rrsp deductions, and I spread the repayment out, or does the first 25k i put back in count as repayment, then I can start getting the deduction again?

[Lews Therin]

Look it up :)

Tax simple .ca is usually quite good at explaining the scenarios, and the tax code itself is not all that complicated a read, when you are looking at specific sections.

[PoutineLover]

You are right, I should be doing my own research.
Funnily enough there is way more info online about what happens if you fail to repay the annual required amount than what happens if you want to repay more. But from what I can tell, it seems like I make whatever RRSP contributions I want, then designate all or part of it as repayment. If I pay extra in a given year, it reduces the amount I have to pay back in following years. But it seems like I shouldn't bother paying extra, because say I contribute 5k to the RRSP (max available to me after deducting pension) then I get a 1,375 refund, which is almost enough to cover the 1,667 I'd owe for the HBP repayment.
So as long as the math on my mortgage works out so that I can still afford to contribute the max to my RRSP (and hopefully continue to contribute to the TFSA as well) I will barely have to put any effort in to repay the HBP. I hope my math is right, because that looks like a great deal to me.

[Lews Therin]

Other math worth looking at, and something I will do with my partner: Is it worth putting 20% down.

She will be using the HBP, and then it becomes a math question of is it worth leaving invested better than the penalty for having not put down the 20%.

(For this current house, at my stupid low 2% mortgage (due to perfect timing in my purchase through luck) it made significantly more sense to put only 5% down, even after the penalty.)

I recommended you look yourself since most people only look once (first house buy) and then aren`t able to use it, so forget / don`t care anymore, so their information might be out of date, and it`s always good to be able to find references yourself.

If you can excel well, I recommend doing multiple scenarios
A) Normal savings, then 20% down buy a house through TFSA
B) RRSP savings, HBP, 20% while refilling as fast as possible
C) RRSP savings, HBP, 20% while refiling as slowly as possible while maxing TFSA
D) Same as B/C, this time with 5%.

Then it becomes a question of how safe is your employment status, since you'll be able to see the monetary difference between the different options.

[The Fake Cheap]

So according to an online calculator, I would get back about $2750 if I contribute 10k to my RRSP. My partner would do the same, so combined we'd be getting back $5500, which we would also put towards the down payment. To me, it seems like using the home buyers plan would be like getting an extra 27.5% return on our money, but with the potential downside of having less room to use later on if we end up making more money.
Our rent is currently super cheap, if we have to move it'll slow down our savings plan but we are hoping to save up enough to buy so that when we do move it'll be into our own place. I have 23k of room to use now, and I'll get another 5k of room each year (since my pension counts against it as well), so I have a finite amount of time (3 years I think) to use this plan. Once I run out of RRSP contribution room or get above 25k I'll switch back to the TFSA instead.
Basically, it seems like the HBP is the financially optimal way to do it right now, at current incomes, using the assumption that I won't be making more money in the future. Since I can't be sure that I will make more money, I think I'll start the plan for now, and re-evaluate if I end up landing another job. Does that make sense?

If your biggest goal is to get the down payment for the house as fast as possible, then the HBP is probably the way to go.