A few weekends ago I was at a taxation seminar put on by a local accounting firm and they were pretty much saying that you should use the HBP. They mentioned it several times. They even went on to say that if you currently have some other debt, say a student line of credit, you should be concentrating on paying that off rather than contributing to an RRSP. Well I don’t know if I agree with that, especially if your line of credit is at prime, as ours is. Not only that, but contributing to an RRSP gives a tax rebate (which you can then throw onto the debt after having maxed out your RRSPs); paying down debt doesn’t. They were pretty insistent that paying off debt should be the first priority. But, they said, you should contribute to your RRSP up to the $20,000 so that you can take advantage of the Home Buyers’ Plan. Huh? They really made it sound like you should contribute just $20,000 to your RRSP, then ignore it and continue paying down debt. It didn’t really make any sense to me.
At one point I raised my hand and asked: “Can you compare withdrawing $20,000 from a line of credit to pay for a down payment vs. withdrawing $20,000 from my RRSP? for example, if my line of credit is at 6% or so and my RRSP is earning maybe 8 or 9%?” Their argument was that they thought I would have to have a much larger return in our RRSP compared to our line of credit to make it worthwhile. Their second argument was that you never know what will happen to interest rates in the future. Their answers weren’t that satisfactory and I expected a bit more from accountants. To make a long story short, after I got home, I started reading about the Home Buyer’s Plan.
The Home Buyers’ Plan is often touted as a magical way to get $20,000 needed for a down payment. I say “magical” because it is often explained in a very simple way without discussing the disadvantages, or any discussion of the alternatives. Here are some examples of what I am talking about:
- Assumption Life makes the assumption that The Home Buyers’ Plan (HBP) is a “winning formula.” “This winning formula can thus help you fulfil your dream to own while also making it possible to maximize your RRSP contributions.”
- This TD article “A Larger Down Payment Means Greater Savings“
- This article from North Shore Credit Union talks about the Home Buyer’s and lists the only downside as being “If the $20,000 were left in the RRSP for 15 years, given an annual 3% rate of return, it would grow to approximately $31,200.” 3%!!! I hope that is real return!
As for #1 above, I think the HBP actually makes it harder to maximize your RRSPs. You will now owe money back to your RRSP and you may be saddled with a fat mortgage on a house that is slightly more expensive than what you might have normally bought had you not taken money out of your RRSPs. You might have a tough time paying off that big mortgage, paying of your RRSPs, and maxing them out every year going forward.
Contrary to what TD says in #2 above, although a down payment means greater savings, I don’t think the HBP necessarily means “great savings.” Here is a comparison between HBP and non-HBP using actual numbers (10% compound return in RRSP, 8% interest on mortgage). It works out roughly the same.
#3 is just laughable. I don’t know where they get their 3% rate of return from. They also claim that “if the homebuyer doesn’t use the RRSP, he/she will acquire a larger mortgage and may possibly even need to purchase mortgage insurance for a high-ratio home loan, which is 3.75% of the mortgage amount.” First of all, 3.75% is wrong, the max is 3.25% or 2.90% (I can’t figure out which, I think it was just lowered though). Perhaps their numbers are out of date. Second of all, if you’re buying a house on the North Shore (North Vancouver), $20,000 isn’t going to lead to a 3.75% premium (from 0%), although it may move you from a lower premium bracket (3.25%) to a higher one (3.75%).
Here’s what I see as the basic alternative to the HBP: Leave the $20,000 in your RRSP and add an extra $20,000 on to your house’s mortgage. This might leave you short of the 25% mark required for you to be exempt from the CMHC premium (of up to 2.75%). Or, it might move you from one CMHC premium bracket to another. This leaves you with a few alternatives, hold off on buying a home until you’ve saved up another $20,000 or take out a loan for $20,000, thus avoiding the CMHC premium (actually I am not sure if the CMHC looks at your other debt or not, if they do consider your other debts, what I just said may not work). You can get everything in between here. In the case where you have 0% down payment you could, again, take out a $20,000 loan or just increase your mortgage by $20,000.
I’d also like to remind you how little $20,000 is nowadays, especially if you are living in Vancouver and buying a condo for $400,000. A 25% down payment would be $100,000. If I get $20,000 of that from my RRSP or from a loan, it not too significant. If you are a couple, the Home Buyer’s plan allows you to take $20,000 from each RRSP which makes it a bit more significant.
The big downside of the Home Buyer’s Plan is that the rates of return from the equities and fixed-income investments in your RRSP may be much better than the interest rate on your mortgage. The amount of lost gains in your RRSP from taking out the $20,000 may be more than the amount of interest you save by reducing the size of your mortgage. The main upside of the home buyer’s plan is that it might allow you to reduce the amount of your CMHC premium. However, another way to reduce the amount of your CMHC premium would be to take out a loan and apply it to your mortgage. In this case, the same logic I used in the beginning of this paragraph also applies. Your RRSP’s rate of return might be higher than the interest rate on your loan. Another downside of HBP is that it can be a disadvantage to have your RRSP descend from $20,000 to $0, let’s say. First of all, when you have $25,000 or more in an RRSP, at some institutions this means you are except from the $125 annual RRSP management fee. Secondly, at E*Trade, for example, when you hit $50,000 in assets your commissions are reduced from $19.99 to $9.99/trade. Lastly, if a bear market is just winding down, that is the worst time to be selling $20,000 in equities from your RRSP.
There is a book from the CMHC called “Impact of the Home Buyers’ Plan on Housing Demand.” It says that “even when the individual has to borrow to make the repayments to the RRSP, there is still a net financial gain.” I think what they are trying to say is that taking money out of the RRSP under the HBP and then paying it back into the RRSP by taking out a loan. I would like to see their actual numbers but I can’t get the report to download.