Thanks TFSA, we don’t need the Home Buyers’ Plan anymore

Thanks TFSA, we don’t need the Home Buyers’ Plan anymore

Buying a home can and is, expensive.  We know.  We are home-moaners ourselves.  It was the biggest financial decision of our life and probably always will be.  That makes saving for your home or condo purchase an expensive and important task.

Effective June 1st this year (now many years ago….), the mortgage loan insurance premium for homebuyers (via the Canada Mortgage and Housing Corporation) with less than a 10% down payment increased by approximately 15%.  This basically means if you don’t have a sizeable down payment, you’ll pay more in mortgage loan insurance to protect lenders against your mortgage default:  the higher the percentage of the total house price/value that you borrow, the higher percentage you will pay in insurance premiums.

So, it goes without saying I guess, if you want to be a homeowner you should at least come up with a modest down payment otherwise homeownership is not for you, financially, at least not right now.

Borrowing from your future self?  The Home Buyers’ Plan

How 20- and 30-somethings are able to save up enough cash for a down payment, in some Canadian cities like Toronto and Vancouver, is a mystery to me.  That unsolved mystery stated, at least one program at disposal was and still is the Home Buyers’ Plan.

The Home Buyers’ Plan (HBP) is a program that (at the time of this post*) allows you to withdraw up to $25,000* in a calendar year from your registered retirement savings plans (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability.

There are a few conditions to take advantage of this plan.

You can read more about the HBP from our government’s website here.

In a nutshell you can repay the amount withdrawn within 15 years and you can repay the full amount back into your RRSP at any time.

Here’s why the Home Buyers’ Plan is not really a great deal:

  • You’ve received a tax refund on the money contributed to the RRSP.

Problem #1

  • You will not receive another tax refund when you put the money back.

Problem #2

  • While you have up to 15 years to pay back the loan, you might be in a higher tax/income bracket when you do. Effectively you are conflict with a couple of core benefits of the RRSP account:
    • Long-term, untouched, tax deferred growth, and
    • Withdrawals that should occur when your income is lower than the income contributed.
  • You are borrowing from your future-self

Sure, the HBP allows you to tap registered retirement savings and provide a down payment for a home or condo now, potentially skirting costly CMHC premiums, but long-term a home is not a complete retirement plan (at least I don’t think so).  Retirement plans by design should be diverse, with a mix of stocks, fixed-income and some real estate assets for starters.  Putting all your eggs into one financial basket (your home) could be an accident waiting to happen.

Furthermore, as a new homeowner you’re going to have lots of new expenses.  You’ll have to furnish the place, let alone fork out more money for insurance, property taxes and likely utility bills. If you feel forced to drain your RRSP to afford a home, homeownership is probably not right for you, at least right now.

If you’re anything like we were, we were focused on adding to our home as soon as we took possession of it.  We weren’t focused on the debt obligations.  With mortgage rates near historic lows you’re probably already inclined to ignore paying down your mortgage today, choosing to spend some of the money instead.  There’s nothing wrong with that – this just means you’ll likely to ignore HBP paybacks for a few years which will only defer your financial obligations.

My advice?

With the annual contribution limit for the Tax Free Savings Account (TFSA) now moved to $10,000 per adult, this is an excellent “home” to sock away some cash for your home or condo down payment.  While TFSAs are great for retirement saving (I’ve thought this from Day 1 and posted this article years ago) they can also help us with homeownership by providing more flexibility to get access to your money.

I’ve never used the HBP and I’m glad I didn’t. 

We saved cash in a high-interest savings account and we used TFSAs just after they were introduced to help us with our most recent home purchase.  TFSAs are excellent for retirement savings, emergency funds or home purchase down payments.  Don’t be swayed by the Home Buyers’ Plan incentives.  It’s a plan to entice you to use assets from your future self.

What’s your take on the Home Buyers’ Plan?

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $600,000 now - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

29 Responses to "Thanks TFSA, we don’t need the Home Buyers’ Plan anymore"

  1. Don’t forget there is “no limit” on how much TFSA contribution room you can accumulate . In other words if an 18 year opens up a TFSA today, he\she can accumulate $10,000 per year (plus any increase in inflation, if allowed). Later when they have actual earnings, they can then begin contributing up the max accumulated.

    Tie the TFSA with a DRIP (depositing small amounts to buy DG stocks) and there will be no fees and probably little tax involved in making the TFSA contributions (possibly some capital gains to claim).

    Reply
    1. I also like the TFSA for this reason, there is a contribution limit but there isn’t a cap on the investments inside the account. I hope that never changes – time will tell 🙂

      Since we already have our place Henry (as you probably know) we’ve got some DG stocks DRIPping every month and quarter inside this account now hopefully setting up a nice cash flow for retirement.

      Reply
  2. I think the HBP plan is still a good option. When you start working, if you have a company contribution plan for RRSP, you MUST take advantage of it to get the company match. It’s free money. Based on that, there is a good use to the HBP plan as you may be putting your money in a RRSP more than in a TFSA until you can accelerate your savings.

    Reply
    1. If you have a company match, group RRSP, then yes HBP could still be considered but I still stand by my thoughts that if you need to withdraw from an account that designed for retirement savings, for a purchase today, that’s not ideal.

      Reply
  3. The HBP isn’t optimal, but it’s one of the few ways for young families to own their own home.

    I used it to purchase my first home many years ago and not only do I not regret it, I would do it again. My financial affairs at the time were horrible, so the HBP was my only route to home ownership. And I’ve done well with increases in home ownership, increases I wouldn’t have realized if I was renting.

    Reply
    1. Fair counterpoints Glenn. Borrowing from the RRSP is one of the ways a young family can get into the housing market. Is this the best financial decision for folks? Only the math will tell them so.

      For us, it wasn’t a great deal since we had some cash already saved up and I figure we were already behind in our retirement savings, so borrowing from ourselves was not a good option. I still feel this way obviously – the RRSP is meant for a retirement plan and a home is certainly not one of those things. Well, maybe if you live in Toronto or Vancouver it is 🙂

      Reply
  4. I never liked the RRSP Home Buyers Plan because you won’t be able to take advantage of the power of compound interest. If you take out $25,000 from the RRSP and repay it back in 15 years… assuming 3% annual return, that’s almost $13,000 you could potentially lose.

    TFSA is a way more flexible account for this kind of purpose.

    Reply
    1. Compounding can occur inside and outside an RRSP, so tax-deferred and tax-free growth is certainly better when compounding can occur. I simply like the TFSA for an all-in-one account but I can appreciate many folks don’t see the advantages. *sigh*

      Reply
  5. Anytime you get a 15 year tax free loan from the gov’t, I would take it.
    The tax refund argument is moot, ’cause you don’t get one with the tfsa either.
    The higher income argument is valid, but there is quite a range before you hit the next income bracket, so depends on what level you are at.
    And if you already have the money in the tfsa, why not just keep that money invested and use it to repay the rrsp over the 15 years.

    Thanks. Love your articles. Keep it up.

    Reply
    1. Sure, a portion of your RRSP is a government loan…but that’s it.

      The higher income argument is very valid. Even more valid is the payback period and the argument that most new homeowners won’t really care about paying back their RRSP loan quickly with rates as low as they are. Debt and owning other people money is evil, but maybe that’s just me.

      Reply
    2. “Anytime you get a 15 year tax free loan from the gov’t”

      When you deduct an RRSP contribution from your income the government is loaning you money that you will have to pay back when you eventually withdraw the money from the RRSP. If you contribute when you are young and in a low marginal tax bracket and withdraw when you are collecting a pension and government retirement benefits there is a chance that you will be paying back more than they loaned you.

      When you borrow from the HBP you aren’t borrowing from the government you are borrowing from yourself and you are going to have to pay back more than you originally contributed. (Because of the tax “refund” on the contribution you only need to save maybe $17000 to $20000 to contribute $25000 but when you repay the HBP you will have to repay the whole $25,000.)

      Reply
      1. “If you contribute when you are young and in a low marginal tax bracket and withdraw when you are collecting a pension and government retirement benefits there is a chance that you will be paying back more than they loaned you.”

        Agreed! This is why RRSPs are not a great deal for low-income earners.

        “When you borrow from the HBP you aren’t borrowing from the government you are borrowing from yourself…”

        Well, you’re borrowing a combination of government loan and yourself. That is the combo that’s in the RRSP. It’s not all government money. Some of it you contributed as well.

        At the end of the day, I don’t like the HBP as you may guess!

        Reply
  6. Nice article Mark, I’m in the same boat right now. My wife and I plan on buying a home next year and I was wondering where to put the money for the short term. For us the TFSA is a no-brainer since the money will be easy to access, and we’re not expecting a ton of growth in 12 months anyway. Always wondered about the HBP…But if I knew property values would double in ten years I wouldn’t hesitate to use it. I’m in Winnipeg though and lately the market is at its peak, hopefully thing will settle down by the time we purchase something.

    Reply
    1. Thanks my friend. Good to hear from you. Just got back from vacation…getting caught up!

      As you say, I think the TFSA is a no-brainer when it comes to savings for a home. The HBP has pros and cons, but I see more bad than good 🙂

      Reply
  7. I currently have my TFSA and my RRSP maxed out and I always assumed I wouldn’t take out the $25K from my RRSP as part of the HBP. However now I wonder if maybe it’s better than I do take it out from my RRSP and leave $25K in my TFSA to grow tax free. It’s a tricky debate, but ideally I prefer to leave money in my TFSA.

    Reply
    1. The TFSA has less complications associated with “paying back” money you took from it. Just wait a year, simple. The TFSA wins over using the RRSP and HBP in my book!

      Reply
  8. I would go one step further: we never needed the RRSP. We need to educate ourselves, the RRSP despite it’s name is not a retirement plan the same way the TFSA (despite it’s name) is not a savings account. It can be used for those purposes but that would miss the point.

    In 1990-91 in my last year of secondary school, the economics teacher dutifully followed orders from the education department (in QC) and distributed materials from the Canadian Banking Association which was putting heavy pressure into putting money in an RRSP.

    The teacher after class would tell a few of us that he was forbidden to talk about the tax credit for dividends from Cdn companies. The reason was that it was easier to pressure us in February into putting money in a bad mutual funds just to get the tax refund instead of investing in quality companies. I propose that’s the same reason the banks were against the TFSA and all of them dragged their feet in updating their computer systems to implement it. They cannot call us in February and put us in panic mode.

    The RRSP is not about your retirement, it’s about ensuring tax revenues in your old age, that much has been confirmed over the years by retired public servants in the mainstream media.

    The RRSP needs to go, it’s complicated, it’s not in our personal interest and with the TFSA there are no justification for it.

    Sorry for the long rant, but the RRSP is a pet peeve of mine. I am glad Mark that you mentioned that compound growth can occur inside and out of an RRSP.

    Reply
  9. I don’t like the HBP for systematic reasons (among other things it sends the message the buying a house is so bloody important that it is one of the only two reasons you can pull from your RRSP prematurely without paying tax).

    But if you’re at the cusp of hitting a 20% down payment (or some other threshold where the fee shifts like 10%), being able to use pre-tax money to boost what you can put down can be well worth it. A couple each in the 30% tax bracket could scrape up an extra $15k that way, all else being equal (if they put $50k pre-tax money into the RRSP they could then pull $50k via the HBP; if they got taxed on it first they could only put $35k into a TFSA or non-registered).

    It’s also good for giving people breathing room — there’s no need to be super-precise in your planning while you’re saving. If you put money in your RRSP for “the long term” and find a few years later you want it to buy a place, it provides a relief valve. But to agree with the main point of your post, the TFSA is even better for that (which is also why I like to say when in doubt, fill the TFSA first).

    Reply
    1. I’ve often wondered John how much the HBP costs to run? From an administrative perspective? Given couples have the opportunity to save $20k per year, into a TFSA, this is a pile of money that could be saved over many years for a home downpayment.

      Your example of using pre-tax vs. post-tax is interesting but what basically happens is you’re using the government-RRSP-generated loan from the RRSP to use as your downpayment only to re-contribute the HBP money you took out at likely a higher, future, tax rate over the next 5, 10, or 15 years you payback the HBP loan. I don’t think many folks think about this – you are not necessarily re-contributing at the same tax rate, so you lose.

      Reply
  10. Hi Mark, that’s true, but for many people if the HBP can make the difference between paying CMHC or not, that will be a bigger benefit than the tax difference, especially for the middle-class where the increases in tax rates are fairly flat. If you put money in while you’re making $50k/yr (31.2% in Ontario), you’re not giving up much future tax benefit if your salary tops out at $85k (35.4%). On $50k that might be $2.1k of additional tax arbitrage if you held off and just used the TFSA, but if it takes you from say 17% down to 20% down it can save you $7.5k in CMHC fees. [using a $500k house] If you can save that much on the CMHC fees, you’d have to move up to the ~$140k level in Ontario (each!) for the additional tax arbitrage to be more valuable.

    Of course, I prefer the solution of just saving for an extra few months/years with the TFSA to get there without the HBP (and getting the best of both worlds) — and would not be sad if it were phased out — but not everyone is as patient.

    I don’t know how much it costs to run, but it definitely adds something — a lot of bank staff have to be trained on this weird use of the RRSP, plus several transactions each year have to be retroactively fixed when some screw-up makes it a taxable withdrawal instead of a HBP withdrawal, in addition to what happens on the government’s side.

    Reply
    1. Hey John, if the argument is about paying CHMC fees or not, then yes, I would agree to avoid those fees if possible but that can be done via the TFSA or cash savings as well – as you know 🙂

      We both agree and I suspect we did about the “just saving for an extra few months or years” to simply try and afford the purchase as much as possible. This advice comes from someone who still sadly carries a fat mortgage of about $200k. I hope it’s dead in 5-6 years.

      Reply
  11. We used both the Homebuyers Plan and our TFSAs to purchase our first home and we don`t regret either. We have a couple of years left on repayment to our RRSP but for us it worth it as it allowed us to buy a house in a very expensive Canadian city when costs were still low(ish)! We feel we have made a really solid investment.

    Reply
    1. Fair point Jess and good on you to payback the HBP loan rather quickly it seems. I suspect most will not do this although I don’t have any stats to back it up.

      Reply
  12. Hi Mark,

    Silly question that hopefully you can answer for me. We took advantage of the HBP when we bought our house. I work for a company that matches dollar for dollar whatever we purchase in company stock/RRSP. So if I put $5000 in for this year and company matches $5000, can the total $10000 be counted towards my repayment for that year? Can’t seem to find the answer anywhere.

    Reply
    1. Hey Brian,

      Not a silly question at all. I’m not an expert, but I believe you could if the company contribution of the RRSP is not “locked-in” – the company contribution portion that is. It really depends on when the company’s contribution is considered yours. I would speak to the administrator of your RRSP to be sure/find out.

      Reply
  13. I was always PRO TFSA. But after doing some research and discussing it with a mortgage broker. As a first time home buyer, it would really help out using RRSP.
    An example in my situation:
    I have 20k in my TFSA and 0 in my RRSP because I have never needed to deferred tax previously. Now I am buying my first house, I can deposit 20k in my RRSP(knowing my limit) and have a potential of 5k in refund. So that is 25k instead of 20k from the RRSP.
    My concerns is the 15-20 years returning the 20k back to the rrsp. Will I get charged interest or taxed? Because with my situation it is really useful to get that 5k tax refund, as supposed to just using my 20k in TFSA.

    Any advise?

    Reply

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