First-Time Home Buyers Plan (HBP)
Planning to Buy Your First Home?
You're growing up and your parents are talking about kicking you out of the basement, so you're thinking about purchasing a home or condo.
One of the best tools you can use to help with the costs of buying a new home is to use the Home Buyers Plan.
For anyone who has ever read anything I have ever written, you probably know that I like to use fairly simple and straight-forward examples to teach, so today we are going to look at a young chap named Chip. Some of his friends call him Chippy.
Chip came to talk to me yesterday and he's worried because his parents are kicking him out of the house in June, because he's been playing Call of Duty for the last 137 hours straight.
Don't ask me how, but Chippy makes $75,000/year, has $20,000 saved and wants to buy a $400,000 house.
He's not worried about cash-flow when he moves, but he only owns a bed, a chair and his X-box, so he figures he'll need to buck up and buy some furniture. The problem is that he needs his entire $20,000 to pay for his 5% down payment.
I say, "No need to fret Chippy, because I can create $6,100 for you to buy some sweet furniture and more video games by just moving your money around a bit before you need it.
I'm talking about the First Time Homebuyers Plan. This is where the Government allows people who are "Qualified," first-time home buyers to access up to $25,000 out of their RRSP to help with the costs associated with buying your first home.
Chippy says he doesn't have an RRSP and I say, that's ok, we can open one up in 5-minutes and then transfer your $20,000 into this account. Then, after it's been in there for 90-days we can access it to pay for your down-payment. The better news is that this is going to create a $6,100 tax-return for you come April when you get your tax-return.
"What's the catch?" He asks.
Not much really, you just have to pay that $20,000 back into your RRSP over the course of 15-years, starting a couple of years from now. So, since you're going to use it in 2018, you'll have to contribute at least $1,333.33 in 2020, or the first 2-months of 2021 ($20,000/15 = $1,333.33).
The only part that kind of sucks is that this won't count as a contribution against your income, so you won't get a tax-return for this contribution every year.
Chip - What if I can't make that payment?
If you can't make the payment, then that $1,333.33 will be added to your income and you'll have to pay tax on it as though it was income.
Chip - That won't happen, but I was curious. What if I just want to pay back the full $20,000 right away?
You can do that, but it's usually not really worth it, because you wouldn't get a tax return for any of that and if you had $20,000 to put in, you could do that and get a tax-return on the whole contribution, minus the $1,333 you owe as a repayment. So, you'd get a tax-return on the contribution of $18,667, so you'd get a nice chunk of change for that.
Chip - You said "usually," why would that ever be a good idea?
If you were absolutely certain that you were going to eventually be making a lot more money than you are now, so you're Marginal Tax Rate will eventually be a lot higher, then it could make sense to make the contribution to pay it all back when your tax rate is lower.
Chip - I have no idea what you just said, but I will nod and pretend that I do.
That's when I show Chip the video where I explain tax-brackets. https://youtu.be/DJrQ_tmW4vg
Now I want to tell Chip a personal story about when I used the HBP. You see, I didn't know about it and had some money saved and some money in my RRSP, so my friendly neighbourhood banker told me about it and I immediately agreed, because the idea of the extra tax savings sounded great. I put in a contribution and had close to $20,000 that I was going to be able to access the next year when I needed it.
Problem was that my banker was a super nice guy, but he wasn't very good at financial planning. He decided to keep my current RRSP investments and my new contribution in the same portfolio I had been using for retirement, which was an Aggressive Portfolio. Over the next few months, my account value dropped by several thousand dollars and I had way less when I needed to access the cash. I probably told him it was ok, but knowing what I know now, he should have told me to switch it to a conservative investment or cash.
So, if you're going to do this, make sure that you have your money in cash, or a very conservative portfolio. The reward of potentially making a few bucks in a couple of months isn't worth the risk of losing money for when you need it.
Other Things to Know
If Chip had a girlfriend, she would be able to access up to $25,000 from her RRSP as well, as long as she qualifies as a first-time home buyer. We all know he doesn't have a girlfriend though.
If Chip was disabled or handicapped, his parents could access $25,000 out of their RRSPs to help him pay for the house.
Chip has to live in this house as his Primary residence.
If Chip bought a house when he was 20, but didn't use the HBP and then moved back in with his parents at 22, he could qualify as a first-time buyer again when he was 27.
If Chip makes an offer to build in 2018 and takes out his $20,000, he has to be moved in by October 1, 2019.
Chip has to be a Canadian Resident at the time he wants to access it.
In the end, if I were really planning for this with a few years to arrange things, I would do my best to really utilize my tax savings.
I would either wait until the end to put my lump-sum in my RRSP so that I get the sizeable tax-return when I need it, or...
If I wanted to use my RRSP now and thought I could save $10,000/year, I would do that this year and when I got my $3,000 tax-return, I would put it back in my RRSP and save the $10,000 again, this way you'll have $23,000 in your RRSP in a few years and you'll get an inflated tax-return the second year, because you put $13,000 in the next year, even though you only saved $10,000.