First Time Home Buyers' Plan
Posted 30 Oct 2014 by Rick Irwin, CFP, CLU
The first time Home Buyers’ Plan (HBP) is a program where the government allows you and your partner to each withdraw, tax free, up to $25,000 from your registered retirement savings plans (RRSPs) to assist with the purchase of your first home. The money has to be repaid but it is being reinvested in your own RRSP and the repayments are not onerous. A participant in the plan has 17 years to complete the repayments and the first payment is not due until the second year after the year of withdrawal, at which point 1/15th of the withdrawal has to be repaid per year. If you miss a payment in a given year that amount is added to your income for the year in question.
Ex: Maximum first time HBP withdrawal of $25,000 = annual repayments of $1666.67 (1/15th of the withdrawal amount) or monthly payments of $138.89
If one year is missed, $1666.67 is added to your income for that year. Assuming you are in the 30% tax bracket this would be approximately $500 in taxes owed
The government does not require first time Home Buyers’ Plan balances to be repaid before allowing new (and therefore deductible) RRSP contributions to be made, so there is no incentive to repay the outstanding Home Buyers’ Plan amount any earlier than required. For example, if you had sufficient available RRSP room and could afford to invest $500 per month you should allocate only the required portion as a HBP repayment and classify the remainder as a new contribution that can then be deducted against your income for that year. You might consider repaying the HBP sooner if you have exhausted all other savings vehicles (no available RRSP contribution room, tax-free savings accounts (TFSAs) maxed out, etc.) or if you expect to be in a much higher tax bracket later in your career and will want all contributions to count as deductible ones at that time, but in general, most individuals are able to stretch the repayments out as long as possible.
Some would recommend repaying the HBP faster to re-grow the investment pool as soon as possible. Remember, however, that any profits earned inside an RRSP are fully taxable as income when withdrawn so rather than fast-tracking HBP repayments, another option could be to invest in a TFSA and only moving the required portion to the RRSP when required.
“Double up” RRSP contributions work well here. This is a plan where you take into account the income tax refund you already have coming to you from RRSP contributions and other sources, and then take out an RRSP loan to put an additional amount into RRSPs to enhance the amount going into the Home Buyers’ Plan. The goal here is that the additional refund from the RRSP loan investment is such that the total tax refund you receive pays off the loan. Loan payments are deferred for 90 days; by that time the refund is in hand and the loan is paid in one fell swoop. This works particularly well for Home Buyers’ Plan acceleration strategies as the money is in the RRSP sooner than if you just reinvested the refund and therefore the 90 day window before you can withdraw funds is that much shorter. Not only will you receive the tax benefit a year sooner than if you re-invested the refund as the refund is not received until the following tax year.
Using the RRSP as a savings tool for a first home purchase could be a great idea for most Canadians as it can fast track the ability to purchase a home through government tax incentives. Even if those RRSP contributions could have had a bigger impact later in life (assuming your income is going to increase later in your career) it can still be a better choice if it will allow you to put down a larger down payment, have a lower mortgage payment, and pay a lower amount in Canada Mortgage and Housing Corporation (CMHC) fees. However, for those who expect their income to jump significantly soon in their career, especially individuals who will have a large portion of their RRSP room eaten up annually by the pension adjustment, it might not make sense to use up a large portion of RRSP room for the Home Buyers’ Plan. It’s a case by case analysis.
It would be ill advised to drain existing RRSPs that were initially earmarked for retirement, due to the opportunity cost of the lost compound growth on this money. If the funds are already earmarked for a home purchase (say a gift from family or general savings) and you have the RRSP room available (and providing that your current income level justifies it) moving these funds briefly into RRSPs will do a lot to fast track your savings goals. If, on the other hand, you are using retirement funds to do so, especially if you do not think you will easily be able to build these back up, you should really consider what the withdrawal will do to your long term retirement plans.
Criteria for Withdrawal
The money has to be in the RRSP for 90 days prior to the withdrawal in order for qualify for a tax free withdrawal under the Home Buyers’ Plan. This can take some advance planning.
You can requalify for the first time Home Buyers’ plan if at the time of withdrawal you have not owned a home that year or in the previous 5 years; also providing that you have fully repaid any Home Buyers’ Plan withdrawals made previously. This can be a good option for individuals who were divorced or otherwise renting for a period after having previously owned a home or who were working abroad.
Use of Funds
The Home Buyers’ Plan withdrawal does not specifically have to be used towards the purchase of a home. As long as you buy a home within 90 days of the withdrawal the funds can be used for any purposes that enables you to afford the home purchase, such as covering closing costs or paying off high interest credit card debt so you can focus more of your cash flow towards the mortgage.
You can also contribute funds to a spouse’s RRSP if you have the available RRSP room and they are in a lower tax bracket than yourself. The money will come out as their own Home Buyers’ Plan withdrawal and they are responsible for making repayments under the plan. This way a family can save up to $50,000 in RRSPs for a home.
The Home Buyers’ Plan is a great program focused on using your hard-earned RRSP savings towards potentially building a better life. You can also read about the Lifelong Learning Plan (LLP) which allows you to use your RRSP savings toward going back to school.
While borrowing to invest can be a powerful means to build wealth, the risks involved make it a strategy that is not suitable for everyone. Your financial security advisor and investment representative can help you determine if borrowing to invest is a strategy that is right for you.