When to take advantage of the Home Buyer’s Plan
First-time homebuyers who have RRSPs often look to supplement their down payment by taking advantage of the RRSP Home Buyer’s Plan. But frequently, they have only a sketchy idea of how it works and whether it’s even a good idea to take money out of what is really their retirement savings.
Spring is typically a very active season for residential real estate, as families upsize and make changes. Most aim for summer closings, so the kids have have time to adjust to new neighborhoods and before entering new schools in September.
Those trading up from existing homes already have equity, and it becomes a lot easier to arrange financing. But for first-time home buyers, it’s a different story, especially those with young families just starting out.
How can you scrape together a down payment?
Saving like crazy is what most young families do to raise a down payment. Gifts or loans from parents are often also a source of funds. But RRSPs can also be another source of ready cash for a down payment, through a government program called the Home Buyer’s Plan (HBP).
The HBP basically lets first-time home buyers withdraw up to $25,000 from their RRSPs in a calendar year to buy or build a qualifying home. That amount will not be included in your income and tax will not be withheld on the withdrawal. So for a couple, each with at least $25,000 in their separate RRSPs, that could mean an extra $50,000 to tack on to a down payment.
What are the rules for HBPs?
There are many rules that apply, but essentially you have to follow just a few key items in order to qualify for withdrawing money from your RRSP under the HBP:
- You have to be a first-time home buyer. Generally, if you or your spouse or partner owned a principal residence within four years before your HBP withdrawal, you won’t qualify.
- You have to be a Canadian resident and have entered into a written agreement to buy or build a qualifying home – that is, just about any type of housing unit located in Canada.
- You have to use the home as your principal residence within a year of buying or building it.
- You have to repay the amounts you’ve withdrawn back into your RRSP over a maximum 15-year period, with a minimum annual repayment of 1/15 of the total withdrawal. You may, of course, pay back more and faster. And to make sure you do, the outstanding balance is listed the annual Notice of Assessment you received after filing your tax return.
Is an HBP withdrawal worth it?
That’s actually a complex question. Basically, the downside of the Home Buyer’s Plan is that you’re taking money out of your RRSP, so it will no longer be growing and compounding within the plan on a tax-sheltered basis. However, the offset is that you’re using to purchase residential real estate.
Residential real estate, especially in Canada’s larger urban markets, has historically been a good investment, at least keeping pace with the rate of inflation, and often exceeding it by a wide margin. So in the investment sense, if you choose the right home in the right location, anything you give up in your RRSP in terms of growth you’re likely to make up in the increase in value of your real estate.
In other words, it’ll pretty much be a wash. In fact, you may even come out a little ahead of the game, because remember, you’re paying back that HBP withdrawal into your RRSP over 15 years, so that money will still be growing and compounding along with your regular annual contributions. It just won’t be growing as fast. When all is said and done, your home will have appreciated, but so will your RRSP.
What should you do?
In general, an HBP is a good source of cash for a down payment on a first home. You’re essentially borrowing from yourself. But you need to consider it carefully in the context of your personal situation. As with any kind of financial planning advice that involves a key personal decision – and buying a home is about as personal as it gets – there are many factors to take into account: the size of your RRSP, the type of home you’re considering, your financial resources, including your employment prospects, your family plans (for example, is a baby on the way?), your ability to repay, and so on.
Everyone’s situation is different in the specifics, and the Home Buyer’s Plan can be complicated. So getting some objective advice from a qualified financial planner is a good idea. We’ll crunch the numbers for you and let know pretty quickly whether an HBP withdrawal from your RRSP makes sense for you.
© 2017 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice. Securities mentioned are not guaranteed and carry risk of loss.