November 20, 2012

Good or Bad News?

Scotia bank reported recently that 40% of a particular client group were cashing in their RRSP’s early to take advantage of the Home Buyer Plan.

Good News. This really isn’t actually cashing in the RRSP because you can withdraw up to $25,000. in a calendar year and not pay tax on the funds if you buy a qualifying home. You then have 15 years to repay the money back into your RRSP (unusually 1/15th every year.) The Home Buyer’s Plan is an excellent way for people, especially
young people, to buy a home.

Bad News? More and more experts are vocalizing their discontent with the new mortgage rules passed by the federal government in July 2012 which reduced the amortization period to 25 years for high ratio mortgages and reduced the home equity amounts from 85% of the property’s value to 80%.

The Canadian Association of Mortgage Professionals told the Vancouver Sun November 20th 2012 that these new rules hinder first-time buyers and have created a policy induced housing market downturn that will affect job creation and the economy as a whole.

I have consistently suggested that more specific action of some type towards consumer debt would produce more positive results than for governments to interfere with the real estate market.

Good or Bad News?

The Scotiabank study also indicated that a significant number of people are cashing in their RRSPs to pay down their debt. What does this tell us?

Many financial advisors would oppose the practice of cashing in RRSPs for any reason. I heard one such expert yesterday say that governments should prohibit the early liquidation of an RRSP. Obviously the loss of the tax benefit is the main penalty. The reduction of your retirement fund a second. However, unforeseeable events happen
to people like health problems, unemployment, forced early retirement, marital breakdown or a global recession.

When people confront a personal financial crisis, what worries them the most? It has been my experience that the loss of their credit rating is on top of the list. People know that their credit rating means their identity and ability to navigate in a world of electronic transfers could be comprised. So, it comes as no surprise to me that many
people would prefer to pay the tax on money they have already earned and saved rather than risk falling into arrears on creditor payments and losing their credit rating.

Under these conditions what would you do? Default on your required monthly credit obligations or use your savings to protect your credit rating?

Finally, it is rarely mentioned that a significant number of individuals and families put too much into their RRSP’s. Some even borrow to top up their limits. Then, when they realize they couldn’t afford to ‘save’ so much, they end up cashing them in and losing the tax benefit. This is a lose-lose situation because the savings were never real and the tax reduction only temporary.

Good News. The global debt crisis has caught the attention of governments, the financial community and consumers. We all need to rethink our usage of credit and how we spend our money.

If you find yourself in financial difficulty and worried about your credit rating contact Solutions Credit Counselling Service Inc. or Women and Money Inc. today do not wait!

Remember, if you are experiencing financial difficulties do not wait. Call Solutions Credit Counselling at 1(877)588-9491 or fill out our Debt Consolidation Questionnaire and get your Free Credit Counselling Advice today.

For more information visit Debt Canada - your Canadian credit education centre.

If you are a woman in debt, speak with Women and Money first. We specialize in helping women with their personal and business financeMoney management advice you can count on!


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