First Time Home Buyers

Based on this Sunday's Reflection post Steve asked:

"If I have a very short term investment horizon (1-2 years before buying a house) do you think I would benefit from meeting with a financial adviser?

Or does it make sense for me to just hang onto cash until I'm ready to take on home ownership?"

What a fantastic question. I was writing the answer when I realized that so many of us are in this exact position and there were so many dimensions to his question that I thought it warranted its own post. (Also note: The older you are, the more relevant this becomes).

The short answer is a resounding "Yes!", and here's the process and reasoning as to why (and what you should look for from the adviser):

Step 1 - You want to buy a house
Buying a house is the single largest purchase you will ever make. A mortgage will be the largest expense from your pay cheque and will longest lasting recurring payment.

Whether you're married, engaged, dating or single, you've probably done your homework with regards to what you want, need and can compromise on with regards to your houses location / size / features to come up with a price range.

This price range determines what deposit you need, your monthly mortgage payments and pay back period. Ok. So far pretty basic stuff.

Step 2 - Making your money work harder for you
Steve makes a good observation that he has a short investing horizon which implies high liquidity needs. He expects to be buying his house within a year or two (not sure if that means he is A. passively looking for a house while building his deposit B. waiting for the market to cool a bit more to get a better price or C. Has everything in place and is actively looking for his dream house).

Either way, this is a *textbook* example of what the Home Buyers' Plan (HBP) was designed for. It allows you to take up to $20k from your RRSP to buy a house for the first time. Also remember that RRSPs are funded with your *PRE*-tax income, giving you another reason to consider using this savings vehicle (As is a Tax Free Savings Account - TFSA, another new pre-tax savings vehicle started in 2008). Those of you with company sponsored RRSPs have another dimension of financing to consider (but check your vesting period). With a short time horizon, his adviser could help him use an RRSP that has conservative growth and low risk as part of his saving strategy for home financing (RRSP's don't have to be made up of aggressive growth stocks. Some RRSP qualified mutual funds are made up of less risky instruments like bonds or GICs and can be liquidated with relative ease - although you need to be aware of all performance, front or rear loaded management fees). These are just some of the solution strategies that a good financial adviser should be able to provide you with.

Aside: At most major banks or funds, if you have *any* type of investment: RRSP, RESP, RSP, discount brokerage etc you probably already have an adviser assigned to you. You should go meet them.

This also brings up another important and relevant topic... RRSPs in and of themselves and how they are affected by house purchases.

Step 3 - Retirement.
It may *seem* far away, but you have to think about it now. Ask your parents. One of their biggest regrets (unless they were born incredibly wealthy) is that they felt like they should have started thinking about their retirement sooner. Needless to say, the impact of buying a house has a *huge* effect on your retirement planning. On top of your mortgage, you have to pay for maintenance (you're the owner now), property tax and a host of other expenses.

Do you remember those adverts which compare a 22 year old person straight out of university who starts saving money versus a 30 year old saving money for retirement? The point they were trying to make is this:

For all the good investment advice in the world, the one thing in life you can't buy is time.

Therefore, for that reason alone, I think it's good to see a planner sooner rather than later. Even if you feel like you don't have a lot of money right now, that's all the more reason to start addressing that issue to plan for your future. Make them earn your business and trust while you build your nest egg and plan for your goals.

Another consideration: If you are married, you have a whole host of options available to you regarding income distribution for taxation and retirement saving which can save you a lot of money especially if one spouse is making more than another and is in a different tax bracket.

There is also a crucial point which is highlighted: the need to revisit financial plans. Your outlook as a young person buying a house will change in the next two years. Envision when you have a house (and a mortgage) and how that changes your cash flow. How will this affect how you save and plan for the future? What we're really saying here is that you have TWO obvious time horizons - 1. Saving for your deposit in two years time 2. Saving for your retirement (please never lose sight of this goal). Don't forget to make sure you also have enough cash on hand to enjoy life now.

Steve, I hope this answers your question, but I would love to follow up or address anything else I may have missed.