RRSP vs. home ownership: opting for home ownership could expose buyer to double whammy

Money Digest, Sept, 1999 by David Karas

Should you buy a Registered Retirement Savings Plan (RRSP) or a house first? Often in the course of life, what seems to be a good idea based on personal needs and wants is exactly the wrong thing when you look at the math.

Consider the math

An excellent example of this is whether a young couple should buy a house or purchase an RRSP as soon as they get married.

Take a couple in their twenties who have started saving. In a short period of time they could purchase a house, with a reasonable downpayment. In 20 years the house could be paid off.

In my model, this means they would be 45, with no mortgage debt. Now, the couple would start to invest in their RRSPs.

Home ownership can be a liability

The unfortunate thing is that the couple would have lost the ability of the RRSP to compound tax free over 20 years. The question now is how much would the investment in the house have appreciated in that same period of time? If you believe the books about baby boomers and where they will put their wealth in the next 15 years, a large home is a liability, not an advantage.

This means, in the example, that our young home buyers are going to get hit with a double whammy. Low growth on the value of the house, or no growth and a substantial loss in value. The second loss is the lack of tax-free compounding in the RRSPs.

How to have your cake and eat it too

An alternative for our young buyers would be to maximize their RRSPs and get the tax refund. Use the tax refund as a savings program to build up the deposit for their home.

This will allow them to have their cake and eat it too.

David H. Karas, CFP, RFP, of Money Concepts, is an Investment and Tax Planning Specialist. He can be seen hosting The Money File on The New VR each weekday morning. Phone 1-800-870-8522.