There’s no doubt that first-time buyers are facing a raw deal in today’s housing market. With their financing options slashed last year by the CMHC, requiring a minimum 5% down payment on home purchases, many would-be buyers have been phased out of the market as they face longer-than-ever savings timelines.
However, one silver lining is presented to this buyer segment in the form of the Home Buyers Plan. This government initiative allows first-time buyers to take up to $25,000 tax-free out of their RRSP to put toward their home’s down payment, to be paid back through installments over a 15-year period. To qualify for the plan you must prove you and your spouse are first time home buyers, sign an agreement stating the money is for a home purchase or build, and take up residence in the home no later than one year after obtaining it.
The option gives buyers a much-needed boost and opens the door to qualifying for ownership - but at the risk of retirement savings.
Home Owners Are Not Keeping Up
The HBP is based on the concept of accessing funds not needed until the future for today’s needs - and they must be paid back in full. The issue, according to the Canada Revenue Agency, is that nearly half of plan participants are missing their annual required payments - one-fifteenth of the borrowed amount - on a yearly basis. According to data shared with Canadian Mortgage Trends, 47% are failing to make payments, considerably more than the previously estimated 25% - 35%. It’s a sign that the home buyers using the plan are perhaps biting off more they can chew... and there are hefty financial repercussions.
Big Consequences for Missed Payments
When an HBP payment is missed, that portion of the loan loses its tax-exempt status and is considered by the government to be regular, taxable income, squeezing strapped homeowners further into a hole of house-based debt, and even further away from a stable retirement plan.
According to the CRA, the HBP has been used 2,555,484 times since its introduction in 1992, and over $7.9 Billion has been pulled from RRSPs for the plan (as of 2011).
Is The Home Buyers’ Plan Right For You?
While there are risks associated with the Home Buyers’ Plan, it’s designed to help, not hinder, responsible home buyers. Here are a few points to keep in mind when considering your financing options.
HBP Pros:
- Down payment possibilities: With recent rule changes enforcing a minimum 5% down payment on home purchases, the HBP gives buyers access to additional funds in order to meet this requirement.
- Tax-free funds: Because the plan taps into RRSP dollars, buyers get a tax break on their home down payments. However, all annual payments must be met in order to keep this tax-exempt status.
- Turn savings into equity: The HBP is designed to take advantage of saved funds earmarked for future use by turning them into real estate equity. When paid back, the buyers will restore their RRSPs, as well as the return from a long-term real estate investment.
- Double-dipping: If buying a home with a spouse, both are eligible for the plan, doubling the maximum withdrawal amount to $50,000.
HBP Cons:
- Retirement put at risk: 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.
- Lost interest building opportunities: Pulling RRSP funds for a downpayment effectively cuts short their interest-earning capabilities. While you’ll benefit short term from the withdrawal, untouched savings will earn far more in interest over the long haul.
- No bankruptcy protection: Even should their finances take a turn for the worst, home buyers are on the hook for their HBP payments. Should they default on their mortgages, they’ll also be in the hole on their retirement.
