Monday, June 19th, 2017
Should I use the Home Buyers' Plan?
Yes. And sometimes, no.
I recently received an email asking me a number of questions about managing finances, among them a question about whether or not the person should dip into their RSPs to use the Home Buyers' Plan (HBP). This person's situation was somewhat unique. She was in her early 60s and nearing retirement, and so my answer to her specifically – or someone in a similar situation – would likely be different than if someone in their 20s or 30s asked me this question.
Let's take a look at when it does make sense to use the HBP and when it might not.
When It Makes Sense to Use the HBP
Being able to take a tax-free "loan" from your RSP of up to $25,000 (each, if you're a couple and you both qualify) is pretty cool. That's a hefty chunk of change to add to your down payment. And that's why it makes sense to use the Home Buyers' Plan. It increases the size of your down payment. This reduces the size of your mortgage, which in turn reduces your mortgage payments. Having a larger down payment means you'll be saving money by not paying as much interest over the life of your mortgage. If you're able to use the HBP to meet the 20% down payment requirement to avoid paying CMHC insurance, then absolutely do it. Especially if you have automatic RSP contributions set up already. Those automatic contributions will help "automatically" repay your HBP, which means you'll have that money back in your RSPs, investing for retirement.
When It Doesn't Make Sense to Use the HBP
The thing is, it doesn't always make sense to use the HBP. In fact, if you already have a down payment of 20% or more, you'll avoid CMHC insurance, and I'd argue that you probably shouldn't use the HBP.
Withdrawing money from an account where you're investing for your future retirement seems fundamentally contradictory in nature, doesn't it? If, for example, the only way you can afford to buy a home is by using up absolutely all of your available funds – including your RSPs – then you're also taking on risk that I would advise against.
If you do think it'll take you the entire 15 allotted years to make your HBP repayments, then I would strongly recommend against using the HBP. Unless you have a defined benefit pension plan through work, or other means that are going to secure your retirement, then you need to be saving for retirement as soon as possible. Remember – repaying your HBP isn't contributing new money to your RSP – it's just replacing what you borrowed.
Many People Don't Even Make Their HBP Repayments
They just add the amount they were supposed to repay to their income for the year (that's how the HBP works: each year, repay the amount you borrowed divided by 15, or else add that amount to your taxable income). This is a double-whammy of bad financial decisions: (1) Losing out on the "tax-free" benefit of the HBP, and (2) Not prioritizing repayments so that the money is reinvested in your RSPs and working toward your retirement goals. So if you either won't be able to afford to make your HBP repayments or just won't prioritize them, then don't use the HBP. Unfortunately, repayment isn't mandatory, which is why many people simply take the income tax hit.
As with many of these types of personal finance questions/decisions, there isn't one clear answer when it comes to whether or not to use the HBP.
Bottom line: If you don't need to use it, don't. But, if using it will help you avoid paying CMHC insurance – and if you'll prioritize repaying it as quickly as possible – then go for it.
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This article is intended to provide general information only about the HBP. If you need further information about your specific circumstances, you should speak to an investment advisor.