November 1, 2018
RRSP Home Buyer’s Plan: The Good, the Bad and the Ugly
Canada is a great place to live, so no wonder our real estate has generally been a great long-term investment. If you’re thinking about when and how to purchase your first home, you may have already heard about something called the RRSP Home Buyer’s Plan (HBP).
In short, the HBP lets you borrow up to $25,000 from your own RRSP account on a tax-free and interest-free basis to put towards your first home. You have 15 years to pay yourself back. What are the ins and outs of the program? Let’s jump into it.
It used to be that, if you had savings in your RRSP and wanted to buy a home, there was no easy way to access your money. You’d have to make an RRSP withdrawal and pay tax on the money, which would seriously cut into your spending power.
Thanks to the program, you can now get your hands on tax-free money to fund your home purchase. If you have a partner, they can do the same, and now you have $50,000 to work with.
Even if you have other sources of savings to put towards a home purchase, it may be worth getting that extra bit of funding to have a down payment of 20% or more of your purchase, because that will help you avoid paying extra mortgage insurance premiums.
Should you delay buying a home until you have that magical 20% down payment? That’s a tricky question, but in most cases, it’s probably worth going ahead even with a lower down payment. Buying a home is a great way to use a relatively small amount of money (your down payment) to control a very valuable, tax-free investment (your home). We don’t have a crystal ball here, but if history is any guide, becoming a homeowner sooner rather than later is a good idea.
Let’s be honest here, $25,000 doesn’t sound like a heck of a lot of money when a million-dollar home is no longer a rarity in some major cities. But that nitpick aside, there is at least one hidden cost of using the HBP that you should know about.
The withdrawal from your RRSP is tax-free, which is great. You are also taking a “loan” of sorts without the usual interest costs you’d expect to pay, so that’s good too.
But consider this for a second: If you did not withdraw that $25,000 and instead allowed it to remain invested inside your RRSP at an annual rate of, say, 6% per year, it would be worth more than $61,000 fifteen years from now.
This is an imperfect model for a few reasons – after all, you’d be repaying yourself over time and the money you put towards your home would also have a chance to grow along with the real estate market – but you get the point. It’s not really free money.
Also consider this: your income might very well rise in the next 15 years, but a chunk of your future RRSP contributions will be considered HBP repayments, not new contributions. That means you could miss out on future tax deductions when they would be more meaningful than they are today.
So, should you start socking money away in an RRSP with the intention of using the HBP when you’re ready to buy? Nope! That is actually a pretty bad idea.
For starters, you only get so much RRSP contribution room in your life, so it’s not ideal to use it up on a home purchase. For example, the $61,000 you could build up over 15 years that we mentioned a moment ago could become more than $125,000 in 30 years.
In contrast, money you save in a TFSA can be withdrawn at any time and you get the contribution back so you can use it again once you’re a happy homeowner.
Another reason not to use your RRSP as a savings vehicle for your down payment is the rules around repayment. Do you really want to be locked-in to repaying it for the next 15 years and risking a tax penalty if you forget to indicate as much on your tax return? It’s not the worst thing imaginable, but again, a TFSA is a much simpler type of account for the job and doesn’t come with any strings attached.
If, for some reason, you’re absolutely intent on putting money into your RRSP then withdrawing it to buy a home, just beware that the money has to stay in your RRSP for at least 90 days before it’s eligible for the HBP.
So, to be clear: if you already have money in your RRSP, the Home Buyer’s Plan might be a good way to access the money to buy a home. But if you’re still saving up for your down payment, you might be better off using a TFSA.
It’s hard to talk about this stuff without using some general assumptions and a bunch of confusing acronyms. To get more clarity on your personal situation, we think the best idea is to build a free financial plan and chat with an expert who can assist you with these decisions. Whatever you decide, we wish you home sweet home!
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