The Home Buyer’s Plan (HBP) is a program that allows buyers to borrow up to $25,000 a year from their retirement savings (RRSP’s) to help finance the purchase of their first home. While the tax-free loan can be beneficial to some, buyers should understand the risks and conditions before committing, and should consult with their brokers and accountants to determine whether it’s the right choice for them.
What are the Pros?
The main benefit of the Home Buyer’s Plan is that it provides buyers with a means of securing some or all of their down payment amount at zero interest. Essentially, using your RRSP savings amounts to borrowing the money from yourself, and paying it back over the next 15 years. The withdrawal from your RRSP does not need to be included in your income on your annual income tax return, and no tax is taken off the money you withdraw.
And the Cons & Risks?
Withdrawing from your RRSPs makes your savings plan grow at a smaller rate, and reduces the power of the tax free compounding inside. Pulling RRSP funds for a down payment effectively cuts short their interest-earning capabilities. Lastly, while the HBP is meant to restore retirement funds in the long run, the onus rests solely on the home buyer to repay them. Failure to do so can leave homeowners with less in the bank come retirement time, and more dependent on their home’s equity to fund their golden years.
If you are planning to buy within the next 3 years, here are some considerations you should take into account:
Make sure your funds aren’t locked in a long-term investment plan. For example, if your entire RRSPs are invested into a 10 year non-redeemable plan, you won’t be able to access them for the Home Buyers Plan.
Remember the 90 day rule- your RRSPs need to have been deposited for more than 90 days before you can withdraw them on loan.
If you’re in your mid 30s, remember that you should be putting at least 5% of your income into retirement savings. Can you still do this, over and above the mortgage and HBP commitments?
Make sure you take into consideration other costs related to your purchase such as notary fees, moving expenses, transfer duties and monthly connection fees.