Will the New Home Buyers' Plan Limit Actually Help With Affordability?
In the 2024 federal budget, the government announced an increase in the Home Buyers’ Plan (HBP) withdrawal limit from $35,000 to $60,000 effective after April 16, 2024.
What is the Home Buyers’ Plan?
The Home Buyers’ Plan allows first time home buyers to withdraw money from their RRSP accounts, tax-free, to put towards a down payment on their home purchase. The money withdrawn must be repaid within 15 years to avoid tax implications.
But who is actually benefiting from this $25,000 increase?
Let’s take a look at the stats…
Since it was created in 1992, 3.6 million Canadians have participated in the HBP.
In 2022, there were 670,000 homes sold and 90,870 of those buyers made an HBP withdrawal.
In 2022, 37,700 people made an HBP withdrawal of $34,000 or more.
But data also shows that as few as 0.04% of Canadians might potentially utilize higher RRSP limits. The change appears to be more about adding perceived value to stack the 2024 budget. This policy change isn’t going to drastically increase accessibility to homes or lower prices—but, let’s be real, home buyers (and mortgage brokers) will happily take any advantage we can get right now!
Home buyers should consider the increase in annual payments
Another point for home buyers to consider is the cost to borrowers repaying their loans. Annual repayments at $35,000 are $2333 per year (over 15 years), while repayments at $60,000 jump to $4,000 per year—this could be up to $8,000 per year if both spouses utilize the maximum HBP withdrawal limit.
According to the CRA, almost 42% of HBP participants that were required to make a minimum payment in 2022 failed to do so. When this happens, anything less than the minimum required repayment amount is reported on line 12900 of the participants’ return and taxed.
Home buyers should also consider the opportunity for a large tax deduction
For home buyers with the contribution room, they can move other unregistered savings (or family gifts) into their RRSP before using it for a down payment. The increase to the withdrawal limit on the HBP allows for the opportunity to create an even bigger tax deduction!
What’s the Best Way to Create a Down Payment?
Many home buyers have to turn to family and friends for financial assistance in buying a home (note: down payment rules apply when it comes to gifted funds). According to a study conduced by Royal LePage:
35% of home buyers receive financial assistance from a lump sum payment (down payment)
25% of home buyers are receiving financial assistance with monthly payments
10% of home buyers have a parent or relative co-sign their mortgage
5% answered ‘other’ or ‘I don’t know’
39% did not receive any financial assistance with purchasing their home
All that to say, the HBP is a great option for coming up with the minimum 5% down payment for home buyers without any financial support available from their family. And, most lenders don't factor RRSP HBP repayments into debt ratios.
Pro Tip:
If a home buyer has already saved (or received) the minimum required down payment, using the HBP reduces their monthly mortgage payments and can save on mortgage interest even more. They can use that mortgage payment savings to pay back the HBP each month, which is often easier than paying one fat sum each year.
RRSP (+ HBP) vs First Home Savings Account (FHSA)
It’s our opinion that home buyers will benefit from depositing savings and maxing out their $8,000/year contribution room in the FHSA first. That is because this money is tax-free and NEVER has to be repaid, making it superior to the RRSP with the Home Buyers’ Plan. After maxing out their FHSA each year, first time home buyers should then move on to putting savings in their RRSP accounts.
In addition, Money must be in your RRSP for at least 90 days before it’s withdrawn. This is not a requirement with the FHSA.
Both options offer the benefit of tax deductions.
If you have questions about using the Home Buyers’ Plan to purchase a home, connect with our team and we’d be happy to help!
