Is it a good idea to use your RRSPs for a down payment on a house?
When you’re looking to purchase your first home, one of the first hurdles you’ll need to clear is putting together enough money for a down payment. Depending on where you live in Canada, that could take anywhere between 10 and 29 years of saving—a daunting prospect to say the least. With average house prices hovering at $525,125 (as of October 2019) you’re aiming at a 20% down payment of just over $105,000.
Regardless of whether your personal target falls short of or far exceeds the average, you’re going to need all the help you can get. That’s where the federal government’s Home Buyer’s Plan (HBP) steps in to save the day—or does it? While it’s intended to make house ownership more accessible for new buyers, there is a lot to consider when evaluating whether it’s a good option for you.
But I’m getting ahead of myself: before we get into the merits of the HBP, it’s worth beginning with an explanation of what it is. In simple terms, the program allows you to borrow up to $35,000 from your registered retirement savings plans (RRSPs) in a calendar year to put towards buying or building your first home. Think of it as a tax-free, interest-free loan to yourself. If you’re purchasing a place with a partner, that’s $70,000 between the two of you. Not too shabby, right? If you’re right on the verge of hitting a 20% down payment threshold (to avoid paying mortgage insurance), the HBP sounds like an especially good deal.
Of course, there’s a catch with using this option—several, actually. For starters, it’s not a simple matter of just taking the money. There are a few criteria that dictate who qualifies for the program in the first place, and you’ll want to make sure you are eligible before counting on it. Once you’re approved, you’ll get to deal with all the fun terms and conditions surrounding the plan.
As I said before, the HBP is a loan and needs to be paid back into your RRSPs within 15 years. More importantly, you need to make a minimum annual payment of at least 1/15 the value of what you withdrew or the outstanding amount is treated as income and taxed. Paying what you owe isn’t straightforward either: RRSP contributions have to be designated as repayments, or they’re just treated as regular contributions. There are other stipulations and requirements, but those are the most salient ones.
Now set all that aside, for a moment, and consider: how many Canadians saving up for their first home even have $35,000 in an RRSP? In 2019, millennials have about $29,000 in their RRSPs on average—a fair chunk shy of the withdrawal cap, and skewed heavily by folks in Ontario and B.C. (who have higher incomes, and higher costs of living to contend with). So, if you’re lucky enough to have some money set aside in an RRSP, is the Home Buyer’s Plan worth utilizing?
As it turns out: no, not particularly. The benefits of the HBP are outweighed by the costs of using it, of which there are a few. True, the program helps with the accessibility of buying a home, but it does not alleviate the difficulty new homeowners will experience with paying for said home. If you’re in the right kind of financial situation (i.e. enough money for a down payment without needing to dip into the HBP) you could use the program to lower your taxes for the year, allowing you to use the refund to put towards your new home. But even so, you’d be negatively affecting the end-value of your RRSP by pulling funds out of it for the HBP in the first place, even if you do manage to stay on top of your repayments. And on a much more practical note: you’ll also be adding the headache of meeting your HBP payments to the stress of juggling your mortgage and other expenses.
Truth be told, tax-free savings accounts (TFSAs) are much better vehicles for those saving up for their first home. You can pull your money out whenever you want without worrying about paying it back, and avoid the hassles that come with the HBP. RRSPs are more useful to individuals further along in their careers, for whom the tax reductions will have the biggest impact. Contributing to them isn’t a bad idea outright, but pulling funds from your RRSPs for your first home has dubious value, at best.
The bottom line is that the Home Buyer’s Plan is an outdated solution for a problem it can no longer address effectively. Unless you’re lucky enough to be in circumstances where you can capitalize on its benefits, you’re better off looking elsewhere.
Let us know your thoughts in the comments.