An Overview of the First Time Home Buyers Plan
The First Time Home Buyers' Plan (HBP) is a program where the government allows an individual to withdraw, tax-free, up to $35,000 from their registered retirement savings plans (RRSPs) to assist with purchasing a first home. You must pay the money back, but you are reinvesting in your 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and the first payment is not due until the second year after the year of withdrawal, at which point 1/15th of the withdrawn amount is due. If a payment is missed in a given year, that amount is added to your income.
Ex: A maximum First Time Home Buyers Plan withdrawal of $35,000 would result in annual repayments of $2,333.33 (1/15th of the withdrawal amount) or monthly payments of $194.44. If you skip a repayment one year, that amount gets added to your income. 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 in full before allowing new (and therefore deductible) RRSP contributions. Given this, there is no incentive to repay the outstanding Home Buyers' Plan amount earlier than required. For example, suppose you had sufficient available RRSP room and could afford to invest $500 per month. In that case, you should allocate only the required portion as an HBP repayment and classify the remainder as a new contribution. 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.) You might also choose to repay sooner 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. In general, most individuals are better off stretching the repayments out as long as possible.
Some would recommend repaying the HBP faster to rebuild the investment pool as soon as possible. Profits earned inside an RRSP are fully taxable as income when withdrawn, so rather than fast-tracking HBP repayments, a better option would be to invest in a TFSA and only moving the required portion to the RRSP as needed.
The opportunity cost of Home Buyers Plan
Using the RRSP as a savings tool for a first home purchase could be an excellent 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 more significant impact later in life (assuming your income to increase later in your career), it can still be a good idea to convert savings to RSPs to buy a home. The benefits are that 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, if you expect your income to jump significantly and/or if you have a large portion of your RRSP room eaten up annually by the pension adjustment, it might not make sense to use up a large amount of RRSP room for the Home Buyers' Plan. It's a case-by-case analysis.
It would be ill-advised to drain existing RRSPs initially earmarked for retirement due to the opportunity cost of the lost compound growth on this money. If you have funds saved 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 home purchase goals. If, on the other hand, you are raiding retirement funds to do so, especially if you do not think you will easily be able to build these up, you should pause and consider what the withdrawal will do to your long-term retirement plans.
Consider an RRSP Loan
"Double up" RRSP contributions work well here. Factoring in the income tax refund you already have coming to you from RRSP contributions and other sources, you then take out an RRSP loan to add additional funds. The idea is to enhance the amount going into the Home Buyers' Plan, and it is ideally structured so that the increased tax refund is enough to pay off the loan. Loan payments come with a 90 day-deferral option, so the first scheduled payment isn't until after you have your tax refund in hand. This strategy works particularly well for Home Buyers' Plan acceleration strategies as the money is in the RRSP sooner than if you just reinvested the refund. Therefore, the 90-day window before you can withdraw funds is that much shorter. You also receive the tax benefit a year sooner than if you reinvested the refund.
Criteria for Home Buyers Plan
The money needs to be invested in the RRSP for 90 days prior to the date of the withdrawal to qualify for a tax-free withdrawal under the Home Buyers' Plan. This can take some advanced planning.
Requalifying for the Home Buyers Plan
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 five 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 working abroad.
Use of RRSP funds
The Home Buyers' Plan withdrawal does not go directly toward the purchase of a new home. As long as you buy a home within 90 days of the withdrawal, the funds can be used for any purpose. This can include covering closing costs, new furniture, repairs or maintenance on the new home or paying off high-interest credit card debt, so you can focus more of your cash flow towards the mortgage.
Using Spousal RRSPs for Home Buyers Plan
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 couple can save up to $70,000 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.
Is the HBP right for you?
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.