Thanks TFSA, we don’t need the Home Buyers’ Plan anymore
This post was updated in early 2023. Original thinking remains below.
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) increased. 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. *The HBP has since increased the amount to $35,000.
In a nutshell you can repay the amount withdrawn within 15 years and you can repay the full amount back into your RRSP at any time.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 a great deal:
Problem #1 – You’ve received a tax refund on the money you’ve contributed to the RRSP. So, you will not receive another tax refund when you put the money back into the RRSP.
Problem #2 – While you have up to 15 years to pay back the RRSP HBP loan, you are conflict with a couple of core benefits of the RRSP account:
- Long-term, untouched, tax-deferred growth, which essentially means….
- 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.
While paying back your Home Buyers’ Plan loan will not affect your RRSP contribution limit, as the money has already technically been contributed, your loan payback is again not tax deductible – you already saved on the tax when you first contributed them to your RRSP.
The Home Buyers’ Plan repayment is also fixed at 15 years, meaning you commit yourself to a long-term loan repayment schedule – back to yourself. This means 15 years of increased home costs and 15 years of paying back your loan will occur, at the same time.
This means, 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 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 material items to our home as soon as we took possession of it. We weren’t focused on the debt obligations. With mortgage rates remaining 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? Don’t bother with the HBP!
With Tax Free Savings Account (TFSA) lifetime contribution room approaching $100,000 per adult, this is an excellent “home” to sock away some cash for your home or condo down payment, tax-free, no strings attached for any late-20 or early-30 something.
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 to help us with our most recent home purchase (in 2010). 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 and only use it if you really, really need it.
What’s your take on the Home Buyers’ Plan?