Homebuyers Plan (HBP): Too Much Of A Good Thing

Another major important component of the recent Federal budget concerned proposed changes to the Homebuyers Plan (HBP).

The primary change would be to increase the amount qualifying first time homebuyers can draw from their Retirement Savings Plans (RSP) to $35,000 from the current $25,000.

This would mean that a couple (provided both met the definition of “first time homebuyer”) could draw a combined amount of as much as $70,000 from their RSPs.

Despite the proposed increase to withdrawal amounts, there are no changes to the repayment requirements. Repayments must start no later than two years after the initial withdrawal.

Full repayment must be made over a 15 year period, and if a required minimum payment (or any portion of it) is not made in a given year, that amount must be added into income.

My concern is that this change may be too much of a good thing. Primarily, this reflects the changing nature of retirement income. Consider that when the Homebuyers Plan first came into existence in 1993, many employees in the private sector were members of employer defined benefit (DB) pension plans.

The combination of the income from those DB plans along with income from Canada Pension Plan (CPP) and Old Age Security (OAS) might very well have covered their basic retirement income needs, with RSP savings helping at the margin, or for the “extras”.

Contrast that situation with today: DB pension plans are the exception as opposed to the rule in the private sector, meaning that employees will be relying to a much greater extent on RSP savings to generate income in retirement.

The problem with that is that if someone is taking $35,000 out of their retirement savings under the HBP, and only making minimum repayments (thus needing the maximum 15 year repayment period), then very nearly 15 years of potential compounding within the RSP is being lost.

Furthermore HBP repayments are not deductible contributions: if the only money an individual could put into their RSP in a year was the HBP repayment, there would be no current tax savings.

As an alternative (or complement) for building a home down payment, consider the Tax Free Savings Account (TFSA). With a TFSA, withdrawals can – but do not have to – be recontributed back to the plan.

Specifically, the value of withdrawals made in a given year get added back to your TFSA contribution limit in the following year.

In comparison to the HBP withdrawal, there is no limit that can be withdrawn from a TFSA. Assuming the current TFSA contribution limit of $6,000, it would take just under 6 years to accumulate $35,000 in a TFSA.

I’m not against the HBP, provided its use has been taken into consideration within the context of an overall retirement plan.

Do you have such a plan in place, and when was the last time you reviewed it? Talking to your Scrivens advisor can help in finding the right balance between your home buying and retirement planning.