The Home Buyers Plan is a government program that allows you to withdrawal up to $25,000 towards the purchase of your first home without any tax being withheld.
You then have to repay this amount over 15 years. Since you have already received a tax refund for these funds when they were originally put into your RRSP, you will not receive another tax refund when you’re paying it back.
With a bit of preparation, this can be a great way to save towards a house. For many first time home buyers, they are likely looking for a way to save for a down payment and reduce any current debt they may have. Before I bought my first home, I put any available savings into my RRSP and used the tax rebate to pay down my line of credit. At the time, I had saved a little over $14,000 over a couple years. This gave me about $4,500 in tax refunds for debt reduction and I was then able to withdrawal the $14,000 for my down payment. Now I must repay $934 each year for 15 years. Since I put more than that into RRSPs each year, I simply reduce the total amount available for a tax refund by an even $1,000 and count that as my repayment. If my RRSP and TFSA contributions are ever both maxed out and I still have money available for saving, then I’ll start repaying more than my current $1,000 a year.
There are some catches, here are the most common ones.
- You and your spouse must not have owned a house it the 4 previous years.
- You cannot use contributions made in the past 89 days.
- The house must be your principal residence.
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Is the HBP always worth it to reduce my monthly mortgage or is the loss in growth for those 15 years not always make it worth it? How can I decide what’s best for me?
Imran, unfortunately you won’t know until the 15 years have passed.
On one side, you can get a mortgage for 5 years for less than 5%, but in 5-10 years from now the fixed rate could be 15%. If that were to happen, you’d be happy to have a smaller mortgage.
With the investments in an RRSP, they might make 10% or more a year, making that the better choice. But it’s also possible that they lose money within the 15 year span.
I personally went with the HBP because it’s a sure thing that I’m ahead but the extra interest I’m not paying on my mortgage. While the RRSP could do better than that interest rate, it can also do worse. More importantly, it helped me put together a 20% down payment, saving me the CMHC insurance you pay with a smaller down payment.
If you want the most balanced way, maybe use the HBP but then increase your RRSPs contributions after that so that you’re getting back in to the market sooner?