You’ve decided to buy a home. Congratulations! Purchasing a home is one of the best long-term investments you can make. But wanting to buy a home and actually buying one are two separate things. In order to buy a home you’ll need to save up a down payment. Luckily, the government will give you a helping hand. The RRSP Home Buyers’ Plan helps first-time homebuyers achieve the dream of homeownership sooner.
Let’s take a closer look at the Home Buyers Plan and whether you should pay it off early.
What is the Home Buyers’ Plan?
The Home Buyers’ Plan (HBP) is a plan created by the government to help make homeownership easier when buying for the first-time. With the HBP, you can borrow up to $35,000 tax-free from your RRSP toward a down payment. (If you’re buying with another first-time homebuyer, that’s a total of $70,000 you can borrow together.)
If you don’t have a lot of experience with RRSP, it’s easy to confuse them with actual investments like stocks and bond. The RRSP is actually a tax-sheltered account. It can hold investments ideal for saving towards a home like high-interest savings accounts and GICs. The government lets you to contribute 18% of your earned income from the previous year or the RRSP limit for the current tax year, whichever is less.
What makes the RRSP so helpful in saving towards a home is the big fat juicy tax refund you’ll get on any contributions you make. Let’s say for simplicity sake your tax rate is 30% and you contribute $20,000 to your RRSP. In this case you’ll get a $6,000 tax refund (30% X $20,000 = $6,000). That’s like a guaranteed 30% return on your savings. It’s hard to beat that! (Note that the size of your refund will depend on your tax rate, but this is just to give you an idea.)
When borrowing money from your RRSP under the HBP, it’s important to follow the rules. Any money you borrow must be paid back in full in 15 years with your payments starting in the second year after you borrowed the money. Any money that’s not repaid is not only added back to your income as taxable income, you’ll lose the RRSP contribution room forever.
Some financial experts say it’s best not to use the HBP because you’re robbing yourself of your retirement savings. While that may be true in a sense, if you’re buying in a big city like Toronto or Vancouver, the HBP may be the helping hand that you need to afford a home. It’s difficult to turn down the guaranteed return the HBP offers. As long as you use the HBP responsibly and pay back any money that you borrow in full and on time, it can be a great program.
Should you Pay Off the Home Buyers’ Plan Early?
If you can afford to pay off the money that you borrow from the HBP early, it can totally make sense. As mentioned, any money that you borrow must be fully repaid in 15 years. Using the above example, if you borrowed $20,000, you’d need to pay back $1,333.33 per year ($20,000 / 15 years = $1,333.33). But if you afford it, why not round it up to $1,500 per year? By doing that, you’d pay off your HBP in only 13.33 years instead of 15 years. Any money you contribute to your RRSP once the HBP is fully repaid will go toward saving for your retirement.
Article written by Sean Cooper.