Most of us rely on a mortgage to make our homeownership dream in the 6ix or anywhere else a reality. Sure, some lucky people can afford to buy an MLS listing in Toronto with cash, but for most of us, a mortgage is the way to go. However, with interest rates at an all-time high, some homebuyers are taking a different tack - they are using their investments to buy a home outright instead of taking out a mortgage.
Want to know if cashing out your investments to buy a home in Toronto is a smart move? In this blog, we’ll dive deep into this approach, breaking it down so you can decide if you should buy a home in this way.
Pros and Cons of Using Your Investment Funds to Buy a House
UPSIDES
Faster Home Purchase
Using investment funds can significantly speed up the buying process of a Toronto MLS listing. There will be fewer delays, faster closing, and less hassle as compared to waiting to save up for a traditional down payment.
Avoiding Mortgage Interest
By using investment funds, you can avoid taking out a mortgage meaning you won’t have to pay any hefty interest. You’ll be using your own funds to buy the house and saving money that would otherwise go to interest payments.
Increased Buying Power
Having a large sum of investment funds at your disposal can increase your home-buying power. You might be able to afford a better home in a more desirable neighbourhood in Toronto. This option also makes you a more attractive buyer to sellers as a cash offer or a large down payment is often preferred by sellers.
Financial Flexibility
Without a mortgage, your monthly expenses decrease which can make it easier for you to manage other aspects of your financial life.
DOWNSIDES
Opportunity Cost
When you use your investment funds to buy an MLS listing in Toronto, you’re basically pulling money out of potentially profitable investments. This means you might miss out on higher returns that your money could have earned if it remained invested.
Reduced Liquidity
Once you use your investment funds to buy a home, your money gets tied up in real estate. And unlike stocks or bonds which can be easily sold or accessed, you cannot convert this real estate investment into cash as easily or quickly if needed.
Less Diversification
Using investment funds to buy a home can lead to less diversification in your investment portfolio. Putting a large portion of your money into real estate can reduce your exposure to other asset classes.
Potential Impact on Retirement Savings
If you use a significant amount of your investment funds for an MLS listing in Toronto, you might impact your retirement savings. You might get in a position where you’re house-rich but cash-poor in your retirement years.
Which Investments Can You Cash In When Buying a House?
Here are some investment types you can consider liquidating while buying a home -
Stocks and Bonds
If you have investments in stocks or bonds, selling them could provide you with a substantial amount of cash. Stocks can be sold relatively quickly while bonds might take a bit longer but both can help towards your down payment goal.
Mutual Funds
Selling mutual funds can also be a good option to buy a Toronto MLS listing, especially if you have a diverse portfolio that’s grown in value. You just need to keep in mind the timing and fees associated with selling.
Retirement Accounts
Another investment option you can tap into is your RRSP or 401(k) for buying the home. This option can provide you with a significant amount of cash but you need to be cautious as early withdrawals can affect your future retirement plans.
Real Estate Investments
If you own rental properties or other real estate investments, selling one could give you a significant cash infusion.
Tax Implications When Selling Investments to Buy a House
When you sell investments such as stocks, bonds, or mutual funds, the profit you make is subject to capital gains tax. This tax is applied to the difference between what you paid for the investment in Toronto and what you sold it for.
Let’s suppose, you bought a stock for $5,000 and sold it for $8,000 and made a $3,000 profit. In Canada, 50% of this profit is taxable which means you would be taxed on $1,500 of the gain. However, the rate at which you’ll be taxed when cashing out investments to buy an MLS listing in Toronto will depend on your total income and the tax bracket you fall into.
There are some strategies by which you can minimize taxes when liquidating investments to buy a home. One way is to invest in tax-advantaged accounts like Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
Gains from investments held in a TFSA are not taxed when you withdraw them which can be quite beneficial if you’re planning to use this money for your home purchase. On the other hand, money withdrawn from an RRSP will be taxed as regular income. However, contributions to an RRSP usually provide tax deductions that can lower your taxable income in the year you contribute.
Another strategy is to plan your investment sales for a year when your income is lower as this might place you in a lower tax bracket and reduce the tax you owe. It’s also important to consider the timing of the sales of your investment to buy an MLS listing in Toronto.
Is It Wiser to Use a Loan to Buy a House Instead of Selling Investments?
When deciding between taking out a mortgage versus cashing out investments to buy a home, there are a few things to consider. First, by financing the home, you can keep your investments intact, allowing them to continue growing. This can be a great strategy if your investments have been consistently growing.
On the other hand, cashing out your investments means you’re using your savings to pay for the home outright, saving you money on mortgage interest. However, pulling from investments could mean missing out on potential profit and potentially affecting your long-term financial plans.
So, what’s the best option for buying an MLS listing in Toronto?
Usually, unless your investments are underperforming or you’re in a unique financial situation, using a mortgage is often a smarter move. It allows you to keep your investments growing while making your homeownership dream a reality.
To make the right decision, always consult with a financial advisor to weigh your specific options and make the best choice for your situation. Happy house hunting!