The Conservative government knows homeownership and real estate affordability are top issues facing Canadians - and they're pulling out the big pre-election guns to appeal specifically to would-be buyers. The latest on the promise platter: a $10-k increase to the maximum Home Buyer's Plan withdrawal amount to $35,000.
Real estate has become a hot-button election issue. The family home is the biggest asset for most families, so it shouldn’t come as any surprise the Conservatives are trying to woo voters. The Tories have already promised to bring back the Renovation Tax Credit, which would provide a 15% tax credit on renovations between $1,000 and $5,000, saving taxpayers up to $600 a year.
With today's stratospheric home prices, many first-time buyers have been forced to borrow much of their down payment - often from the bank of mom and dad. The idea behind expanding the Home Buyer's Plan is it will aid first-time buyers tap into more of their RRSP savings, and avoid taking on debt for their home purchase. But will this really help buyers afford more?
How the Home Buyers’ Plan Currently Works
Under the Home Buyers’ Plan, first-time homebuyers are able to withdraw up to $25,000 each ($50,000 for couples who both qualify) from their RRSP towards the down payment of a home. Starting in the second year, the borrowed money must be repaid over 15 years. Failing to repay your RRSP can be a costly mistake – not only is the income taxable, but the RRSP room is also lost forever.
Is Upping the Home Buyers’ Plan a Good Idea?
While there’s no arguing access to more saved cash will help first-time homebuyers scrape together a down payment, housing experts are worried it could add more fuel to the fire of the already overheated housing market. Bank of Canada governor Stephen Poloz stated our housing market is overvalued by up to 30%, posing a big risk to the Canadian economy.
Real estate affordability is especially of concern in Toronto and Vancouver. Detached homes sell for over $1 million on average in those two cities alone. While boosting the Home Buyers’ Plan withdrawal limit from $25,000 to $35,000 would give couples a combined $70,000 to put towards the down payment of a home, it wouldn’t address the lack of supply.
Those in favour of upping the Home Buyers’ Plan say it’s needed to address skyrocketing home prices. The facts speak for themselves: the withdrawal limit has been frozen at $25,000 for over six years. The last change was when the Tories upped it from $20,000 to $25,000 for any withdrawals made after January 27, 2009. That’s been the only increase to the Home Buyers’ Plan since inception in 1992. While the withdrawal limit has only increased by 25%, during this time the average home price has jumped a whopping 205%!
Backpedalling on Policy?
Upping the withdrawal limit on the Home Buyers’ Plan would be a change of pace for the Conservatives. The Tories have already made a number of moves to make it more difficult for first-time homebuyers to break into the increasingly costly real estate market. Mortgage amortization has been trimmed back in recent years from 40 years to 25 years. This has resulted in first-time homebuyers being able to borrow less money. For those making a down payment between 5% and 10%, mortgage default insurance premiums have also increased. While there appears to be no clear consensus on whether upping the Home Buyers’ Plan is a good idea, there’s no doubt that many first-time homebuyers will like this move, even if it comes at the cost of their retirement savings.
Sean Cooper is a Financial Journalist and Personal Finance Expert, living in Toronto, Ontario. He offers Unbiased Fee-Only Financial Advice, specializing in pensions and the decumulation of financial wealth in retirement. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website: http://www.seancooperwriter.com/