Home Buyers Plan
If you are like other Millennials in the Barrie area, one of your top goals is likely home ownership. The decision to buy versus rent has long been debated and there are many pros and cons to each side. Today I want to review the First Time Home Buyers Plan, for those that have decided that buying is right for them.
What is the First Time Home Buyers Plan (HBP)?
The HBP allows funds to be withdrawn from an RRSP to a maximum of $25,000 to help finance the purchase of a home. For homes purchased jointly, each buyer may withdraw up to $25,000. To qualify, a number of conditions must be met. For example, you have to be a first time home buyer, must be entered into a written agreement to buy or build a qualifying home, have to be a resident of Canada, plus other qualifying criteria which we will gladly discuss with you when you are considering buying a home.
Once withdrawn, you have 15 years to pay back to your RRSP or you’ll be taxed on the income. If for example, if you withdraw $10,000, then $10,000/15 = $666 a year must be repaid. When repaying, you must file a Schedule 7 RRSP Unused Contributions, Transfers, and HBP or LLP Activities. Once again, we can help you sort that.
Is the HBP a good idea?
The main purpose of today’s blog is to help you determine if it’s a good idea to use the HBP. As with any choice, there are some advantages and some disadvantages, but it’s a decision you have to make.
You Get to Own a Home
Without withdrawing from the HBP, you may not have enough of a down payment to get into home ownership. Often though, we recommend if you have to borrow for the down payment, you may not be quite ready for home ownership.
Saving on Interest
Every dollar you can put towards the down payment ultimately saves you money on interest costs. Having said that, you lose interest on your RRSP tax-sheltered investment – it’s a trade-off (and potentially not a good one).
Money withdrawn from an RRSP is your money, so you borrow it from yourself interest free.
Loss of Earnings on RRSP
The main purpose of an RRSP is grow tax-sheltered investments. If you withdraw the funds to help pay for your home, you obviously lose that growth opportunity. Assuming you could earn 4% on your RRSPs and you withdraw $20,000 for the HBP, you’d lose out on $11,192 of growth by the time it’s repaid.
You Have to Pay it Back
At the end of the day, it’s still a loan, so you have to pay it back. You must ensure you have the cash flow to pay it back because if you don’t, the funds will be added to your income and you’ll have to pay taxes on the money. Remember, when you put the money into the RRSP, you received a tax-break, so if you don’t play by the rules of the CRA, you lose that advantage.
Most of our clients use the Home Buyers Plan for peace of mind, only withdrawing $5,000-$6,000 to help ensure they have enough for closing costs and other fees, like setting up internet at the new home and a cushion for that first month’s electricity bill. They always have the intent to pay it back in 2-3 years too, not the prescribed 15. Home ownership should not be a spur of the moment decision and the earlier you start saving for a home, the less you’ll have to rely on this program. Ultimately, it is your choice to use the Home Buyers Plan and we are here to help you make an educated decision on whether it’s right for you or not.