Trying to scrape together a down payment for your first home can feel like a daunting task amid the rising costs of housing in Canada. In response, the federal government announced a series of measures to “solve the housing crisis” as part of its proposed 2024 budget, including a new maximum withdrawal limit for the Home Buyers’ Plan (HBP).
Under the new HBP rules, Canadians can withdraw up to $60,000 from their Registered Retirement Savings Plans (RRSPs) – an increase of $25,000 – to finance the down payment of their first home. And, for now, they have an extra three years to start repaying it.
This comes one year after the introduction of the First Home Savings Account (FHSA), which was also designed to ease the path to homeownership in Canada.
‘Additional opportunity’ for first-time home buyers
In most cases, Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth, says Canadians saving for their first home should start with an FHSA. The FHSA allows for tax-deductible contributions up to $40,000, tax-free growth up to 15 years, and tax-free withdrawals.
“So, the FHSA is the best of everything,” Golombek told Yahoo Finance Canada.
From there, he says it’s “the classic debate” between RRSPs and Tax-Free Savings Accounts (TFSAs). Generally, Canadians who are in a higher tax bracket today than they will be in retirement stand to benefit from RRSP contributions, Golombek suggests. And increasing the HBP withdrawal limit gives them greater flexibility.
“You now have this additional opportunity to keep contributing to the RRSP knowing that you’ll be able to tap $60,000 of that [for the purchase of your first home],” Golombek said.
Like the FHSA, contributions to an RRSP are effectively made with pre-tax dollars, which helps to accelerate savings, says Aaron Hector, a private wealth advisor at CWB Wealth Management. Since TFSAs do not offer this feature, they would be “down the list from a home savings perspective,” he says.
Combined with $40,000 from an FHSA, a maximum RRSP withdrawal would give Canadians $100,000 in pre-tax dollars – or $200,000 as a couple – to help fund their down payment.
“And any growth on the FHSA can come out tax-free as well,” Hector said in an interview with Yahoo Finance Canada.
Budget for RRSP repayments
Unlike FHSA and TFSA withdrawals, any amount withdrawn from an RRSP for a first home eventually needs to be repaid. And that’s where there was another tweak.
Previously, HBP participants had to pay back the full amount over 15 years, following a two-year grace period. Now, for any withdrawals made between Jan. 1, 2022 and Dec. 31, 2025, the grace period has been extended to five years.
“They’re just giving a little bit more flexibility at the front end, not having to have that cash flow burden to put money back into your RRSP [as quickly],” Hector said.
Anyone making a withdrawal in 2024, for example, wouldn’t need to make their first repayment until 2029, Golombek explains. From that point on, they’d have to repay a minimum of $4,000 per year, assuming they withdrew the full $60,000.
“You’re always allowed to pay more,” Golombek said. “You can also pay less. The problem is if you pay less, the difference between what you’re supposed to pay and what you paid is simply taken into income in that particular year.”
Then it becomes taxable, and you’ve lost that RRSP contribution room forever, he adds. So, Golombek says anyone utilizing the HBP should budget for the annual repayment.
“If you forget that, then you’re going to be short $4,000 a year potentially and your retirement will suffer,” he said.
Be aware of the 90-day rule
Although the budget has yet to receive royal assent, the government says the new HBP withdrawal limit is already in effect. The Canada Revenue Agency confirmed as much in a recent statement issued to the financial industry, Golombek notes.
However, anyone on the verge of buying their first home should note that the funds need to be in their RRSP for 90 days before they can be withdrawn under the HBP, Hector cautions.
“I think there might be some people out there who don’t fully understand all the rules and mechanics of how this works,” he said. “They might rush to put that extra $25,000 into their RRSP, to get from $35,000 to $60,000, and then look to buy a house next month.
“Well, no, the money hasn’t been in the account long enough for you to actually access it.”
Will the HBP changes help Canadians to buy a home?
Based on his dealings with home buyers within the Greater Toronto Area (GTA), Victor Tran, a Toronto-based mortgage broker and realtor, doesn’t expect there to be much pick-up on the new HBP withdrawal limit.
“I think the difference is marginal at best,” Tran said in an interview with Yahoo Finance Canada. “The number of people who would have that kind of money in an RRSP and don’t already own a home isn’t all that significant.”
Additionally, with average home prices in the GTA exceeding $1 million, Tran says most of his clients have to put a minimum of 20 per cent down. An RRSP withdrawal, even at the new limit, isn’t enough. So, many of his clients choose to keep their RRSP funds growing for retirement, partly to avoid the repayment obligations.
Instead, Tran says they tend to pull from their TFSAs and non-registered investments. He expects FHSA withdrawals to increase in the coming years as Canadians begin to maximize their contributions. Or, even more common, they receive a gifted down payment.
“Often, the gift is pretty large,” he said.
So far, Tran says he hasn’t received a single inquiry on the HBP changes. That’s not to say they won’t help some first-time home buyers, he acknowledges. But he doesn’t believe they’re “going to push a lot of people off the sidelines to purchase.”
Farhan Devji is a freelance journalist and published author based in Vancouver. You can follow him on Twitter @farhandevji.