Why People Are Using Their Retirement Savings for Down Payments

Why People Are Using Their Retirement Savings for Down Payments 1024 480 Guardian Financing

Many Canadians dream of becoming homeowners, but there are many obstacles that they must overcome. Some of the challenges faced by the majority, especially the young families, include the rising cost of housing, rising costs of living, the need to save for retirement and other financial needs including day to day expenses like utilities, rent, and grocery.

As such, many Canadians have been compelled to change their financial habits and adapt to current situations while still keeping their dreams of owning a home alive. One of the habits they have been forced to change is postponing saving for retirement, and using their retirement savings as down payments to buy a property.

Retirement savings for a down payment

It is estimated that 20% of Canadians have put their retirement savings on the backseat so that they can become homeowners. This may not sound like a wise thing, but it is necessary to adapt to the current financial landscapes just to own a home.

Rent is one of the biggest expenses for most Canadians, and it is understandable if many would wish to eliminate it so that they can have some financial breathing space. Due to this, Canadians see it fit to delay saving for their retirement so that they can use the money as a down payment that will enable them to own a home.

Canadians are also tapping into their retirement savings with the government’s Home Buyer’s Plan. With this plan, those who want to own homes are allowed to withdraw up to $25,000 from their RRSP savings and use it as part of the down payment. However, those going this route must ensure that this money is repaid back within 15 years, or they may have to face certain tax penalties.

Other sources of down payment

Before people started tapping into their retirement savings as a source of down payment, the majority used to rely on personal savings as the main source of down payments when considering mortgages for home ownership. About 71% of the population is believed to have used personal savings to fund the down payment, but then, there are other sources people can use for down payments. The most common sources include:

  • Financial gifts – nearly 50% of Canadians use the money they receive as financial gifts as part of the down payment. In such a case, all they have to do is save the money and not use it for anything else other than adding it to their down payment piggy bank.
  • Proceeds from past sales of houses – most people have also used proceeds from past sales of their houses as their down payment. This is very common when dealing with mortgages in Montreal.
  • Sale of investments – investments such as stocks and bonds are also being used to fund the down payment by very many Canadians.
  • Secured loans – It is estimated that about 11% used secured loans as a source of down payments when buying homes.
  • Credit card borrowing – about 8% of people used credit card borrowing to fund their down payments.

It is worth noting that Canadians are making a lot of personal financial sacrifices in order to own homes. This is not just fueled by the desire to become homeowners, but also with the fact that there is a positive outlook about real estate. If people were not confident in the state of the country’s real estate, no one would bother becoming homeowners and they would be focusing on other things such as how to get out of debt instead of risking their retirement to buy houses.