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You’re Not Raiding Your Retirement If You Use The Home Buyers’ Plan (Unless You Are)

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.

Related: First Time Home Buyers – HBP or TFSA?

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.

Related: My biggest regret was getting in over my head as a first time home buyer

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 $25,000 isn’t enough of a down payment, so the program is outdated.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.

RelatedOur $35,000 basement renovation – Why we paid someone else to do it

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.

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11 Comments

  1. Potato on September 18, 2014 at 8:55 pm

    Good points as usual, Sandi, particularly the last one about robbing retirement one way or another. I think the HBP should be scrapped entirely, but as long as it’s around and people are buying houses against my better judgement anyway, then they should probably use it (especially to avoid CMHC fees).

  2. My Own Advisor on September 19, 2014 at 4:36 am

    HBP = spending the income designed for your future self to buy an expensive house you really can’t afford today. Just my take 🙂

    Mark

    • Sandi Martin on September 19, 2014 at 6:48 am

      But that’s true for any money you use as a down payment, if you “shouldn’t” be buying a house (for any number of reasons). Why is HBP an especially bad circumstance?

  3. Tracey H on September 19, 2014 at 6:28 am

    I think you’re minimizing the impact of taking money out of an RRSP and gradually putting it back in. You didn’t make a comparison of the person who didn’t take it out. That money would have grown tax-free over those 15 years.

    If, however, taking money out of your RRSP to buy a home means your downpayment is enough that it will mean you avoid having to be insured by CHMC, that’s a good reason to do it. Just pay it back (I’d say quickly for peace of mind).

    • Sandi Martin on September 19, 2014 at 6:55 am

      I don’t think I am. Being able to appropriately save for your retirement is part and parcel of being able to “afford” a house in the first place. Using RRSP room (and the vast majority of us have room to spare for any number of reasons) to save for a house doesn’t automatically mean that you’re NOT saving for retirement AS WELL.

      I didn’t compare to someone who didn’t take the money out at all because they had to save it up somewhere, didn’t they? The issue is not “how much will my money grow over fifteen years”, or “what’s the difference between how fast can $25,000 grow over 15 years vs. how fast can $1,667 deposited each year grow over 15 years” it’s “can I afford to buy a house AND save for retirement”.

      Whether the fictional person saved up $25,000 in a non-registered acccount or TFSA or an RRSP using HBP is irrelevant – what matters is the fact that they saved up $25,000 (or more, or less) and withdrew it from ANY source. That means that they “diverted” that money from their long-term savings, and the question should always whether THAT is appropriate.

  4. Robert on September 19, 2014 at 7:52 am

    Good article. I liked point 3 in particular. Many people blow money all the time without worrying about it’s long term effect. If you fly south every year, regularly buy the most expensive i-gadgets for the cool factor or trade in your car during the high depreciation years, you should not be the person questioning the effect on your retirement of tapping the HBP.

    During an incredibly messy divorce, and an era without TFSA’s, I turned to HBP as my only source for a down-payment on the cheapest house I could find that met my needs. I then worked like crazy at wrestling the mortgage down to zero. I liked the forced savings every year as money returned to my RSP. (disclaimer – I was doing this after a housing crash, but in an era of 10% mortgages)

    I never bought into the notion of “losing tax-free savings in an RSP by using HBP”. Actually the plan is brilliant that way. A house is also tax free savings if it is your only one, and a place to live too.

  5. John Woods on September 19, 2014 at 1:35 pm

    In your example hasn’t Rory simply thrown away $1667 of contribution room in his RRSP because Tax wise the result is the same whether he claims the 5000 deduction + 1667 extra income or the 1667 re-contribution and $3333 deduction?

    • Sandi Martin on September 20, 2014 at 7:46 am

      Tax-wise, yes. It’s a wash whether you take the $1,667 as extra income or deposit to your RRSP. But post-house, that $1,667 invested for the long-term in a tax-deferred RRSP isn’t “thrown away contribution room”.

  6. Sean Cooper, Financial Journalist on September 20, 2014 at 7:45 pm

    Great post, Sandi. Speaking of things that should be scrapped, what about CMHC? Why are Canadians subsidizing other Canadians who can’t afford to save a 20% down payment? I know there are many positive spin off affects of real estate, but I don’t think it’s fair my tax dollars should go towards helping other people who can’t save a large enough down payment.

  7. Tracey H on September 21, 2014 at 6:51 am

    Sean, CHMC does a lot more than insure mortgages. And are you sure taxpayers are subsidizing that part? It’s my understanding that individual buyers are paying their own insurance to CHMC in full.

  8. Noel D'Souza on September 22, 2014 at 2:03 pm

    Brillant article, as usual Sandi!

    There’s an excessive amount of hand wringing over the HBP, when the HBP isn’t the issue. As you pointed out, the real issue is “Can I Really Afford This Home?”, and a secondary question is “… And Still Save For X (Retirement, Kid’s Education, etc)?”

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