Is using your RRSP to buy a house passé? – Ask Bruce Coleman, Vancouver Mortgage Broker
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The $25,000 Ottawa allows you take out of your retirement fund to buy your first home sure doesn’t go as far as it used to.
Under the home buyers’ plan, Canadians can take $25,000 out of their registered retirement savings plan and pay it back over the next 15 years without incurring any penalty. For a couple that means $50,000.
But the dollar amount has been stuck at $25,000 since 1999 while house prices have continued to escalate. At $50,000, you’re barely making the minimum downpayment if you are buying a home in Vancouver with a mortgage backed by the government.
The Canadian Real Estate Association says the average price of a home will climb to $391,000 next year, meaning that $50,000 is less than 13% and not enough to avoid costly mortgage default insurance.
“I don’t know how effective the plan is now, so I’m not sure what would happen, if you increase the amount,” says Don Lawby, chief executive of Century 21 Canada.
It’s not just the amount. The tax-free savings account is now just as an effective savings vehicle. As of 2014, Canadians were allowed to contribute $31,000 and the amount increases every year. You can also withdraw money from a TFSA and put it an equal amount back later.
“I think you almost need a combination of the two plans together to fund that kind of investment,” said Mr. Lawby, about buying a house. “It depends on where you live in Canada.”
The home buyers’ plan was launched with a $20,000 withdrawal limit and it jumped to $25,000 in 2009.
One of the arguments against increasing the limit is it will encourage young Canadians to rob their retirement savings to buy a first home. Paying the money back over 15 years — there are significant penalties if you don’t — means you might not have the money to make current contributions.
“Some people say the RRSP is not the most efficient way of saving for a house,” says Benjamin Tal, deputy chief economist with CIBC World Markets.
He says there hasn’t been an acceleration in the use of the home buyers’ plan because first-time buyers are being squeezed out of the market.
“Older people and people buying second properties don’t use their RRSPs to buy homes,” says Mr. Tal. “You would expect given rising prices there would be more use [of the plan.].”
Vince Gaetano, a principal of monstermortgage.ca, says the home buyers’ program is mostly being used by people as a tax loophole.
“This is the most popular time of the year to do it. They manipulate the system to deliver a tax return on the downpayment they will [already be] making on their purchase,” he says.
If you know you are buying your first home in the next 90 days, you make a $25,000 contribution or $50,000 for two people. That means a big refund in April. You then withdraw the $25,000 or $50,000 to pay for that initial home.
“Most people have the RRSP room. If you are buying a house by June and you have the downpayment in cash, you make the contribution to trigger the the refund,” said Mr. Gaetano, noting the $25,000 has to be in the plan for 90 days before you can take it out.
“You can garner $20,000 in refunds,” said Mr. Gaetano, pointing out it will depend on what your marginal tax rate is.