First Time Home Buyer: HBP Or TFSA?

It can be a challenge for first time home buyers to come up with a down payment.  With soaring Canadian real estate prices, crippling student loan debt, and low starting salaries, it can take years to save the required minimum down payment.

Canadians do have some options to help them buy their first home.  This post will explain the benefits of a first time home buyer using the Home Buyers’ Plan (HBP) or TFSA for a down payment.

Related: Why our debt to income ratio is misleading

First Time Home Buyer: Using the HBP

The Home Buyers’ Plan allows you to withdraw up to $25,000 as a loan from your RRSP without paying tax.  Under the HBP, only a first time home buyer is eligible to participate, unless special rules for persons with disabilities apply.

You are considered a first time home buyer if neither you nor your spouse owned a home during the four calendar years prior to the year of withdrawal, and up to 30 days before the withdrawal.

Loan repayment under the HBP must take place over a period of 15 years, or less if desired.  The repayments begin in the second year following the year of the withdrawal.  If the required repayment is not made, an amount will have to be included as income in the year of the shortfall.

If you have previously participated in the HBP, there are certain situations in which you may be able to participate a second time.  First of all, the full amount previously withdrawn must be paid back into your RRSP before the beginning of the year that you want to participate a second time.  Also, you must still qualify as a first time home buyer.

If you contribute an amount to your RRSP, you can’t make a withdrawal under the HBP within 90 days of that contribution, or your ability to claim a deduction for the contribution may be restricted.

As a general rule, you should make your RRSP contribution more than 90 days before the withdrawal.  After a waiting period of 90 days or more, your deduction may generate a tax refund, which can also be applied toward your down payment.

As a first time home buyer, if you have money on hand for a down payment and have accumulated some RRSP contribution room, consider opening an RRSP.  You can deposit that money, wait 90 days, be eligible to participate in the HBP, and at the same time use your tax refund to add to your original down payment amount.

Each spouse or common-law partner can withdraw eligible amounts from their RRSPs under the HBP.  This also means that each person may withdraw up to the $25,000 limit, or $50,000 total (if purchasing the property jointly).

First Time Home Buyer: The TFSA Solution

The TFSA is a registered plan like the RRSP, but differs from the RRSP because contributions to the TFSA are not tax deductible.  The flip side is that withdrawals from the TFSA are not taxable, and that includes any gains earned in the plan.

The TFSA is ideal for saving up for a down payment for a house, and can even be a better solution than the HBP for a first time home buyer.

Unlike an RRSP, you don’t need earned income to create room for the contribution.  For example, a 22-year-old new graduate with a starting salary of $40,000 will only create $7,200 in RRSP contribution room for next year.  With the TFSA, he’ll already have $25,500 in contribution room by 2013 ($51,000 when combined with a spouse).

The other issue with the HBP is that when you first start out in the job market, your income is likely to be low.  Since you’re in a lower tax bracket, your RRSP contributions will result in a lower tax refund.

Final Thoughts

The Home Buyers’ Plan is a good option for a first time home buyer if they have already invested in RRSPs and don’t have any savings outside of their RRSPs.  You can withdraw up to $25,000 ($50,000 when combined with a spouse) tax-free, and repay the amount over 15 years.

For young Canadians just entering the workforce without any savings inside their RRSP, it makes sense to use the TFSA from the beginning to save for a down payment on a house.  The TFSA can offer a more flexible solution for first time home buyers.


26 Responses to First Time Home Buyer: HBP Or TFSA?

  1. One item of note, you can’t get a loan to contribute to your TFSA. It may have more room for contribution, but unless that 22 year old lives at home still, they aren’t going to be saving 50% of their gross pay very easily.
    However, a loan to get the RRSPs started, using the return to pay down the loan a nest egg to use as a down payment is created.

    • Hi Randy, that’s a good point. However, you still have the same RRSP contribution room, whether you take out a loan or not. Also, the tax refund usually doesn’t come close to paying off the RRSP loan in full, so now you have to come up with extra money each month to pay that down.

      • Also very valid points, but the underlying point with both ideas is that each case will be different based on the situation and future goals of the individual.
        A serious cause of concern for all first time homebuyers right now should be that the banks are targeting stricter limits on mortgages, while allowing unsecured consumer debt to grow. The fallout for that could be a larger down payment being required, somewhere in the 7.5 to 10% range. I believe that would have an extremely staggering negative impact on housing prices in Canada by taking a significant segment of the population out of the market, and causing a loss of equity for those already having purchased. The Globe reported on this with a very negative slant, http://ow.ly/963F3.

  2. It should be noted that there can be huge penalties to withdraw RRSPs for the Home Buyers Plan. This was very disappointing. There is no incentive to repay our bank the RRSPs we withdrew. We assumed that the HBP would have mentioned this little fact.

    • Two things worth knowing:

      You are right, you don’t owe your bank to repay the RRSP, you owe it to the government because of the tax break they offered. So, it is a great time opportunity to search other RRSP offered by the many companies on the market.

      Let say I HBP’d my RRSP with Bank One in 2013. Two years later, i’ll be able to sign a new RRSP with Bank Blue and put the information in my tax declaration.

      Second. Penalities are indeed HUGE and financial institutions aren’t going to sell RRSP investment products if they focus on these. Now, if you really want to be scared, make some research on what happens with HBP repayment and RRSP in case of a divorce. Not cool :(

  3. @Kam

    What sort of huge penalties? Were they related to liquidating whatever you had in your RRSP?

    Why was there no incentive to repay, if you don’t repay it won’t you be dinged for the withholding tax?

    Joel.

    • Some of our (GICs) RRSPs were locked in for a certain amount of time and we couldn’t withdraw them without a penalty to the bank. So we could not withdraw the maximum $25,000.00 each. The reality seems to be that when purchasing RRSPs – one has to keep the $25,000.00 available for an upcoming house purchase. That amount of money would be earning the least amount of interest just to be available for the HBP. When the right house and price presents itself – we should be allowed to take advantage of that situation (immediately).

      • That makes sense now. I’m looking to using my RRSP for HBP in the next few years so I have started to liquidate my portfolio of growth-style mix of ETF’s. The trouble is I can’t figure out what (if anything) to invest in. I’m told cash is king but getting basically no return is hard when I’ve done very well in the past few years in terms of returns…

        Savings accounts? GIC’s? Treasury bonds, municipality bonds?

  4. If I had known better I would have never used the HBP.
    6 years ago I was encouraged by a bank consultant to take advantage of the HBP. Back then I had around $13,000 sitting in my RRSP. So I withdrew $12,500 and put it towards my home down payment (I put down additional $20,000 from my high interest savings account).

    Now here comes the catch.
    I have a fairly good job. Every year I end up re-paying back around $1000 to my RRSP. On every thousand I pay around $310 income tax! So yes, it is free to repay to RRSP (no interest) but no-one had mentioned that this would be added to my income tax!
    And this will be actually taxed again when I’ll be taking money from RRSP once I retire.

    To me it might a good option for some young people when they badly need a new home (or low income families).
    Otherwise you will end up loosing lots of money on income tax.
    Think twice before taking the “advantage” of this first HBP..

    Just my 2cents, hope it’ll help someone out there..
    Dave

  5. @Dave

    I’ve been researching all over and this is the first I’m hearing about having to pay tax on the repayment? That can’t be right. I thought you only pay tax on it if you do not repay the minimum amount (since it is then added to that year’s income).

    Can someone please clarify this for me.

    • I’m with you Matt, the only tax you pay is when you do not redeposit your yearly required amount. You are borrowing money from yourself, and only pay the penalty when you don’t live up to your obligation.

  6. Sorry guys, it is my real experience. Every year I pay back $1000 to my first HBP (meaning paying back to my RRSP where I took it from) – so no penalties should be considered. Please do a simple math on how much is to be paid back on $12,500 HBP in 15 years or better to say per year (1/15).
    And this believe it or not does result in my increased taxes.

    I’ve tried to submit my tax files using a certified accountant then calculating it via Ufile (accounting software) and it really does affect what you have to pay to CRA. I am not an expert, don’t call it income tax if you will but certainly I am ending up paying more than without having this HBP burden. My true story..
    Dave

  7. Nope. I do not owe any taxes. That’s for sure!

    Joel, I don’t have any T1 slip.
    All I do I put back the portion of money I took from my RRSP under the first HBP 6 years ago.

    On My 2013 CRA Notice of Assessment, 2013 HBP statement of Account I see this:
    Total Withdrawals (2007): $12,450
    Total repayments: $3,631
    Repayable balance remaining: $8,819
    2013 minimum required repayment (11 years left): $801

    D.

  8. @Dave, here’s 2 possibilities

    Are you making your RRSP contributions for the repayment of the HBP through payroll deduction at work? If so, the work computer may be reducing the tax you pay on those pay cheques, tax which then has to be repaid when you file because you can’t get the tax deduction for HBP repayments. (This is the only thing I can think of that would result in new taxes being owing in April because of a HBP repayment.)

    The other possibility is just a trick of the eye, not new taxes:
    How were you able to find how much tax the HBP re-contribution is costing you? Did your accountant compare [a return filled out with the RRSP contribution reported, but not reported as a HBP repayment] subtract [a return with the RRSP contribution reported and reported as a HBP repayment]? Because that will show more tax payable because you’re comparing a return with a new RRSP contribution to a return without a new RRSP contribution. In that case what you’re seeing is not new tax that you are paying, but that you are repaying the HBP with after tax dollars, which is correct since when you took it out temporarily to buy your house you also took it out in after tax dollars.

    There is no new tax owing on repaying a HBP, but there could be what looks like new tax owing, for the reasons above. If you really have been paying new tax, you need to find out and get it back!

  9. An interesting comparison — and thoughtful comments to boot.

    I’m currently using a TFSA because I don’t want to be on the hook for paying back my RRSP. It feels like adding debt on top of debt. Does that make sense to anyone other than me? I’d love to hear other people’s thoughts.

    • It makes perfect sense. But you also need to consider the interest you’re paying on your mortgage balance by not using HBP. Bigger down payment means less interest paid in the long run. This is at the expense of a 0% interest loan to yourself through the HBP with a strict 15-year repayment plan, which is a pretty good deal. It also comes at the cost of potential investment opportunities by not leaving your money in RRSPs but I’ll take the guaranteed return in mortgage interest savings every time.

      If the money is in your RRSPs, use it. It’s one of the few opportunities you can withdraw from your RRSPs before retirement to help yourself out now, which puts you in a better place to help yourself in the future.

      • I see your point, but I wonder if the investment gains would outweigh the mortgage interest with interest rates this low? I guess only time will tell…

        I think what it boils down to is this: if the money better invested in a home (less mortgage interest and more equity) or in the markets? I wish there was an easy answer for that!

  10. I’m an advocate of the TFSA, I think you should keep your retirement money in your RRSP and not touch. Focusing on earning a nice rate of return over the long run will definitely help your portfolio growth. I also think the HBP is restrictive in that you can’t use money unless it has been in your RRSP for 90 days. TFSA offers much more flexibility.

    • True but ideally you should max out your TFSA *and* save in your RRSP. You can only take $25k out of the RRSP in the HBP which is tiny compared to what you need for a good down payment and to pay the closing costs. Closing costs alone (land transfer tax; legal fees; mortgage fees; repaying property taxes paid by the current owner; etc.) are often $10k.

  11. We did TFSA only. I didn’t want to be forced to buy-back my own money and the government’s loaned money (since that is what an RRSP refund is).

    I would suggest first time home buyers consider the TFSA, especially when they are just starting out in the workforce and they are not in their peak earning-years.

    Mark

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