From what I can tell, most of the arguments against using the Home Buyers’ Plan are really arguments against buying a house you can’t afford, or castigations of the government for incentivizing home ownership…because people are buying houses they can’t afford.
Remember: reduced to its simplest parts, the Home Buyers’ Plan allows you to withdraw $25,000 from your RRSPs to use as a down payment on your first home. You have 15 years to replace the money in your RRSP (doesn’t have to be the same account, any RRSP will do), or else pay income tax on the portion you don’t replace in any given year.
A short example of the Home Buyers’ Plan:
Amy and Rory each withdrew $25,000 from their respective RRSPs to buy a house together. This year, both will deposit $5,000 to their RRSPs, but Amy has decided to designate $1,667 of her deposit as her annual Home Buyers’ Plan repayment – meaning it won’t be deducted from her taxable income that year – and claims the remaining $3,333 of her deposit as a tax-deductible contribution.
Rory has decided that he will claim his entire $5,000 as a contribution, which means that $1,667- 1/15th of the $25,000 he originally withdrew – is added to his taxable income for the year.
The most common arguments against using the Home Buyers’ Plan found in newspaper columns, blogs, and subreddits across the country go like so:
1. $25,000 isn’t enough of a down payment, so the program is outdated.
Well, sure it’s not…if you’re buying in one of the big cities, or paying the average price of $398,000 or so. You know you can save up more than the $25,000 withdrawal limit outside of your RRSP, right?
And just because some of your savings are with pre-tax dollars and some are with after-tax dollars, does the fact of your after-tax savings existence negate the benefit of your pre-tax savings? Not really.
You also know that you can spend less than the average, right? $25,000 is a 20% down payment on a $150,000 home. $50,000 is a 20% down payment on a $250,000 home. We’re talking about sums of money that can still go a long way in small-town Canada.
2. You have to pay it back over fifteen years or else add 1/15th of it to your income any year you don’t, so it’s just another debt.
Let’s say you decline to pay back your 1/15th this year, and you make $90,000 a year. Your tax bill will go up by $724. I want to be really, really clear about this: If a) you can’t afford to save $1,667, or b) pay an extra $724 in income taxes because you bought a house the problem is emphatically not that you used the Home Buyers’ Plan. The problem is that you bought too much house or are spending too much money.
3. You will be robbing your retirement to buy a house.
Look, we rob our retirements to buy a lot of things. Just because the “robbing” doesn’t always take the form of an RRSP withdrawal, it doesn’t make it any less true.
Money diverted from long-term goals is money diverted from long-term goals whether it’s taken from our RRSPs, our TFSAs, or from under our mattresses, whether we use it to buy a house, a new iPhone, or a series of piddling little purchases we can’t even remember.
If you can really, truly afford to buy a house, and have been ruthlessly realistic about the amount of house you can afford while still saving appropriately for retirement, using your RRSP to defer income taxes on your down payment is a smart thing to do.
Sandi Martin is an ex-banker who left the dark side to start Spring Personal Finance, a one woman fee only financial planning practice based in Gravenhurst, Ontario. She and her husband have three kids under six, none of whom are learning the words to “Fidelity Fiduciary Bank” quickly enough. She takes her clients seriously, but not much else.