After watching Ratehub.ca’s video on the Home Buyers’ Plan (HBP), I had to stick my nose where it belongs and chime in.
For one, the video was fantastic. If you are a mortgage broker, financial advisor or a future homeowner, that video should be shared with everyone you know. Having the power to draw from your RRSP during the purchase of a home is a huge advantage, and knowing how to make the most of it is key!
I’m not a huge fan of RRSPs, as I don’t like the fact that this form of “savings” creates 100% taxable income in the future. When you decide to access your funds, you will be taxed on your withdrawals because the CRA sees them as “RRSP income”; I’ve seen one too many people crippled by this. However, the HBP is one of the few things I love about RRSPs. Here’s why:
1. You can spend the withdrawal on anything! You don’t actually have to use the money you withdraw through the HBP for your down payment. Instead, you could setup a savings cushion, so those new home bills don’t sneak up on you. You could also pay off high interest debt, invest in a TFSA, or even use it to pay for your moving costs. The point is that the withdrawal is allowable based on the criteria being met, but no one can tell you what to do with it!
2. You don’t have to pay it back. Canada Revenue Agency seems to throw around the words “you have to repay”. Now, one would most likely read that as “must repay” or are “required to repay”, like you have to with your mortgage. If you borrow money to buy a house, of course you have to repay it. However, CRA doesn’t actually require that you pay back what you borrowed from your RRSPs. Now, that doesn’t mean there isn’t a consequence for not doing so, and Ratehub.ca does a great job of explaining that in the video. My point is that maybe it’s not in your best interest to repay it. You could be better off taking the smaller tax hit spread over a number of years and invest that “minimum repayment” amount in something else. You could put it in your TFSA where it will grow tax-free, never to be taxed again, rather than in your RRSP, which will give you some tax benefits now, but in your golden years when every penny counts you’ll keep less of your own money! My point here is sometimes using a HBP withdrawal and not repaying it is a long-term-tax-benefit gift horse; don’t look it in the mouth.
If you’re considering using the HBP program when buying your first home, know the facts — they’re your financial power!