First-time homebuyers face some major financial challenges, not the least of which is coming up with that down payment. You might be a young family just starting out, or a single person or couple looking to build some real estate equity. Whatever your situation, you have one thing in common: the pressing need for ready cash. And raiding your RRSP through the Home Buyers' Plan looks almost irresistible. But does it make sense?
According to the Canadian Real Estate Association, the price for an average home in the Toronto area was $510,000 in February. In Greater Vancouver, it logged in at over $590,000!
That’s a pretty steep price for families looking to purchase their first home. For first-time buyers, it means a lot of scrimping and saving and begging and borrowing for a down payment. Granted, mortgage rates are still extremely low, ranging from about 2.3% for a closed 1-year term to 2.7% for a 5-year term. But mortgaging everything, even with a second mortgage, is playing with fire, especially when – not if – rates start to climb.
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 Buyers' 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 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 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- You have to repay the amounts you’ve withdrawn back into your RRSP over a maximum 15-year period, with a minimum annual repayment of 1/15 of the total withdrawal.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.
Is it worth it?
That’s actually a complex question. Basically, the downside of the Home Buyers' 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 it 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 the 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. At the end of the day, 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, and 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.
To make an RRSP withdrawal under the HBP, you have to complete and file CRA Form T1036-12e. Everyone’s situation is different in the specifics and the Home Buyers' 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 you know pretty quickly whether an HBP withdrawal from your RRSP makes sense.
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