We’re taking a little step off the beaten path this week and talking about home ownership. Last week, I warned investors about the downfalls of investing on hype, mainly within the cannabis industry. This week, we’re going to talk about a huge tool I used to purchase my first home at 21 years old.
A long long time ago, in a galaxy far far away. Just kidding, it was September 1st, 2011. I had finally purchased my first house at the age of 21. Excited? Hell yes I was. I had dreamt of home ownership ever since I muttered the words “man am I getting ripped off” when I paid my landlord my first rent cheque.
Homeownership has always been a goal for me. You can argue until the cows come home about whether or not owning a home is advantageous with today’s ridiculous prices. But I still believe it is. Peter Lynch, my all time favorite investor and one of the best of all time once said owning a home is bar none the best investment you can ever make. So much so that he suggested home ownership before ever investing a dime in the stock market.
Lynch’s statement doesn’t exactly ring AS true today
Now, this came from his book One Up On Wall Street. Lynch published this book in the 80’s when the real estate market wasn’t as crazy as it is right now. But in my opinion, there is very little, in fact, no advantage in your younger years to renting rather than owning. Now, this isn’t to say that this statement applies everywhere. There are definitely some areas in Canada, like Toronto and Vancouver that are literally so expensive that it is cheaper to pay the rent than pay the mortgage. But if you don’t come from one of these giant cities, owning should be your first priority.
I’m not going to feed the fire on the rent vs buy debate in this article. I’m not even going to talk about the advantages of buying a home. And trust me, I could go on for hours about it. This article will simply lay out the plan I had as a 19-year-old with dreams of home ownership in the near future.
How I used the RRSP Home Buyers Plan to purchase my first house
I had just recently decided to stop attending Red Deer College. My big dream was becoming a computer programmer/web developer after completing a 4-year degree. I had moved to Calgary to begin my career as an electrical apprentice as the industry was booming, and the pay was great (and yes I know, do what you love, yada yada yada).
My line of thought was by the time I completed my four years of schooling, I would have a 6 figure job under my belt and be able to save up for that big down payment. But over time, I researched ways that I could accelerate this process and get into a new home as soon as possible.
I stumbled across something called the RRSP Home Buyers Plan, and man, am I thankful I did. For those of you who don’t know what the RRSP Home Buyers Plan is, it is an amazing program that the government put to work in 1992. The plan enables you to withdraw any contributions(up to $25,000) from your RRSP absolutely tax-free (and not subject to capital gains tax), granted it is going towards the down payment on your first home. I was 19 years old, and had absolutely no idea what an RRSP even was. But I knew I had to get one and get one fast.
How I used my companies benefits to increase my RRSP
So, I figured out what an RRSP was. My Uncle, whom I lived with during the rough months of my near minimum wage probation period worked for the same company. He informed me that my company matched up to 5% of my contributions to their group RRSP. I did the paperwork, got the account set up, and directed 18% of my paycheque to go into the account every time I received one. I was putting the equivalent to almost a quarter of my pre-tax wages into my newly crafted RRSP. It was a ton of money. Thankfully, all I was required to do was contribute to the utility payments and food once a month. I figured just had to cut back a little on the boozing and I’d be fine.
A little RRSP tip to anyone who is new to the scene. If you know a little bit about RRSPs, you may know that 18 percent is the absolute maximum you can contribute per year. But, I was able to contribute more than the maximum as my contributions from jobs I had previously hadn’t been fulfilled, so they carried over.
This went on for about two years. I kept contributing to the original company I started with, and a new one I decided to go work for in northern Alberta. When you’re dumping that amount of money into your RRSPs, it’s going to add up quick.
In early 2011, I finally had enough money
I decided that all of my savings I had put aside from my job outside of my RRSP would go towards furnishing my new place. I wasn’t going to spend a ton. But I would allocate most of my money to what any typical 21 year old would do. A good TV, and a great sound system.
As far as my RRSP goes, I had enough money in there to place 10 percent down on a 1350 square foot townhome in Strathmore Alberta. I headed to the Government Of Canada’s RRSP Home Buyers Plan website, filled out the paperwork, and the rest is history.
I didn’t realize I had to pay it back
I was pretty stoked. Two years of dumping a boatload of money into my RRSPs and I was a homeowner. Not a fancy home by any means but a home. Something I owned, and something that will appreciate in value, unlike the money that vanishes into thin air the moment you give it to your landlord.
One big mistake I faced with the Home Buyers Plan is I didn’t really read all the fine print. I wasn’t aware that the money had to be contributed back to your RRSP within 15 years. It was there, right in front of my face. I just failed to read it. I filed my taxes for 3 years afterward, having no clue I had to designate a certain percentage of my RRSP contributions back to the Home Buyers Plan.
For those who are yelling “why didn’t your tax representative tell you!”. I did my taxes myself. I got sick and tired of paying someone to file two slips of paper for me for $200+. But that’s a story for another time.
In case you’re wondering, there can be years that you can claim zero dollars towards your plan. But ultimately, you want to get this paid off as soon as possible. Any amount you put towards your RRSP Home Buyers Plan is not eligible for a tax deduction. The government views it as a repayment to the “loan” you took out of your RRSP.
The RRSP Home Buyers Plan is an amazing stepping stone that you need to take advantage of
The RRSP Home Buyers Plan allows you to take $25 000 out of your RRSPs tax-free and put it towards a down payment. For young aspiring homeowners, that gets you the 10% you need on a small condo. This in turn, allows you to ditch your landlord. The Government Of Canada allows you plenty of leeway in terms of paying it back, as you have 15 years to do so. If you take out the maximum, it equates to about 138 dollars a month you need to contribute back to pay off the balance. That $138 dollars gets placed back into your RRSP. From there, it has the chance to earn interest and capital appreciation from investments. I don’t know about you, but that sounds like a pretty amazing deal to me.