As your local Kamloops mortgage broker, I am diving into the increase in withdrawal limits for the Home Buyers’ Plan. Is this exciting news for first-time home buyers, or is it all just a charade put on by the federal government?
Saving for a down payment on your first home can seem daunting, given the rising housing costs in Canada. In the 2024 budget release, the federal government announced a series of measures to “solve the housing crisis.” One of these measures is an increase in the maximum withdrawal limit for the Home Buyers’ Plan (HBP)
Who benefits from the increased limit?
Since its inception in 1992, an incredible 3.6 million Canadians have participated in the HBP.
According to the latest CRA data, 1,653,900 still have a HBP balance as of December 31, 2022.
What do the stats say?
In 2022, 670,000 homes were sold; this included MLS sales and new construction.
90,780 buyers dipped into their RRSPs to support their purchase.
Of those 90,780 buyers, how many utilized the maximum withdrawal limits of the HBP?
- 20,340 people made an HBP withdrawal of $34,000 or more
- 17,360 people made an HBP withdrawal of $35,000 or more
The percentage of people pulling out the maximum HBP withdrawal is about the same as it was five years ago.
Hence, as few as 0.04% (four one-hundredths of a percent) of Canadians might potentially utilize higher RRSP limits.
The average first-time home buyer is 36 years old. According to Statistics Canada’s 2019 figures (the most recent available), the average person under age 35 saved $9,905 towards retirement (RRSPs only) and held $27,425 in non-pension financial assets. For Canadians aged 35 to 44, these numbers are $15,993 and $23,743, respectively.
Who can afford to pay it back?
With the increased maximum withdrawal from your RRSPs also comes more time to start repaying it. Previously, HBP participants had to pay back the total amount over 15 years, following a two-year grace period. The grace period has been extended to five years for any withdrawals between January 1, 2022 and December 31, 2025.
CRA says 41.7%—to be precise—of HBP participants who were required to make a repayment in 2022 “did not make the minimum required repayment.”
For those without family to help purchase their first home, the HBP can help build a 5% minimum down payment more efficiently than most strategies, aside from the First Home Savings Account (FHSA). The HBP generates up-front tax savings, lets money grow tax-free, and allows penalty-free tax-deferred withdrawals.
Anyone withdrawing in 2024 wouldn’t need to make their first repayment until 2029. From then on, they’d have to repay a minimum of $4,000 annually, assuming they withdrew the entire $60,000 — or up to $8,000 combined if both spouses take out $60,000.
When it comes to repayment, you’re always allowed to pay more or less. If you pay less, the difference between what you’re supposed to pay and what you paid is taken into income in that particular year.
Then, it becomes taxable, and you lose that RRSP contribution room forever. Anyone utilizing the HBP should budget for the annual repayment.
HBP Tips
The HBP is essentially an interest-free loan. Treat it like a loan, and prioritize repayment if you do not want to incur a forgotten tax burden.
- The qualifying home must be your primary residence and acquired or built before October 1 of the year after the first withdrawal.
- Have you sold your pad in 2019 or earlier? If you and your better half have been off the homeownership grid ever since you could qualify for a first-time buyer encore. That is, you might be able to participate in the HBP in 2024. That’s assuming you’ve paid off any previous HBP balance by January 1 of the year of your subsequent HBP withdrawal.
- Money must be in your RRSP for at least 90 days before withdrawal, but that’s not true with the FHSA.
- If you and your spouse split up, you can use the HBP (or use it again if you’ve already used it) to buy out your ex’s slice of the homestead pie.
- There is no minimum period for you to live in the home.
- Speak with a financial advisor to understand the cost of forgoing future tax-sheltered growth potential to reduce your mortgage size. Saving default insurance premiums and interest is usually a good reason to raid your RRSP, but not always.
