What is the Home Buyer’s Plan?
According to Revenue Canada’s website:
The Home Buyers’ Plan (HBP) is a program that allows you to withdraw funds from your registered retirement savings plans (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability. You can withdraw up to $25,000 in a calendar year.
Generally, you have to repay all withdrawals to your RRSPs within a period of no more than 15 years. You will have to repay an amount to your RRSPs each year until your HBP balance is zero. If you do not repay the amount due for a year, it will have to be included in your income for that year.
How does it work?
So if you had $25,000, then each year you must repay $1666.67 (1/15 of $25,000), otherwise you will get a tax penalty equal to your personal marginal tax rate.
Is it worth it?
This is a short but very complicated question so I will try my best to answer it by dividing it up into various scenarios. In my article, I will assume you are continually employed and you will repay the required amount each year.
Part 1: Is it worth it even if you have 20% or more down payment?
RRSP: $25,000
Non-Registered Account: $25,000
Home price: $50,000
Investment Rate of Return: 9% (or 7.65% after tax)
Annual Cashflow to Finance Debt: $2000
Consider this simple scenario: You have $25,000 in your RRSP and $25,000 in your Non-Registered Account and you are looking to buy a home valued at $50,000. You could either buy the home “outright” using HBP or take out a 50% mortgage on the home while keeping your RRSP still intact. Which scenario is more advantageous to you?
Scenario A: You utilize the Home Buyer’s Plan and with that $50,000, you buy the home outright. Each year, gain $2000 and you pay the minimum required (1/15 or $1666.67) required as per the HBP conditions. The remaining money ($333.33) is reinvested in a Non-Registered Account.
Scenario B: You pay down $25,000 and take out a mortgage for the remaining $25,000 with a interest rate of 2.3 and 15 year mortgage. Your total payment is $29,795.40 and you slowly pay that off each year with your $2000 per year income.
Assumption: Your RRSP is invested at 9% return and your Non-Registered is invested at 7.65% return (after 15% tax).
Scenario A | Scenario B | ||||||
|---|---|---|---|---|---|---|---|
| Yr. | A's RRSP (9% RoR) | A's Non-Reg (7.65% RoR) | A's Mortgage Remaining | B's RRSP (9% RoR) | B's Non-Reg (7.65% RoR) | B's Mortgage Remaining (2.4% interest) | |
| 0 | $0.00 | $0.00 | $0.00 | $25,000.00 | $0.00 | $29,795.40 | |
| 1 | $1,666.67 | $333.33 | $0.00 | $27,250.00 | $13.64 | $27,809.04 | |
| 2 | $3,483.34 | $692.16 | $0.00 | $29,702.50 | $28.32 | $25,822.68 | |
| 3 | $5,463.51 | $1,078.44 | $0.00 | $32,375.73 | $44.13 | $23,836.32 | |
| 4 | $7,621.90 | $1,494.27 | $0.00 | $35,289.54 | $61.15 | $21,849.96 | |
| 5 | $9,974.54 | $1,941.91 | $0.00 | $38,465.60 | $79.46 | $19,863.60 | |
| 6 | $12,538.92 | $2,423.80 | $0.00 | $41,927.50 | $99.18 | $17,877.24 | |
| 7 | $15,334.09 | $2,942.55 | $0.00 | $45,700.98 | $120.41 | $15,890.88 | |
| 8 | $18,380.83 | $3,500.98 | $0.00 | $49,814.07 | $143.26 | $13,904.52 | |
| 9 | $21,701.77 | $4,102.14 | $0.00 | $54,297.33 | $167.86 | $11,918.16 | |
| 10 | $25,321.60 | $4,749.28 | $0.00 | $59,184.09 | $194.34 | $9,931.80 | |
| 11 | $29,267.21 | $5,445.93 | $0.00 | $64,510.66 | $222.85 | $7,945.44 | |
| 12 | $33,567.93 | $6,195.88 | $0.00 | $70,316.62 | $253.54 | $5,959.08 | |
| 13 | $38,255.72 | $7,003.19 | $0.00 | $76,645.12 | $286.57 | $3,972.72 | |
| 14 | $43,365.40 | $7,872.27 | $0.00 | $83,543.18 | $322.14 | $1,986.36 | |
| 15 | $48,934.96 | $8,807.82 | $0.00 | $91,062.06 | $360.42 | $0.00 |
Results:
NO! It is not worth it!
After 15 years, Person A would end up with $49,000 in his RRSP and $8.8K in his Non-Registered. However, Person B would end up with a staggering $91,000 in his RRSP!
If you have over 20% down, there is no reason to utilize the Home Buyer’s Plan. The reason is that the mortgage interest is low enough that you are better off keeping the RRSP re-invested
Part 2: Is it worth it if you only have 5% down payment?
RRSP: $25,000
Non-Registered: $8,000
Home Price: $160,000
Investment Rate of Return: 9% (or 7.65% after tax)
Annual Cashflow to Finance Debt: $12,500
Our next scenario: You only have $8,000 down on a $160,000 home which represents 5% down. Of course you will need CMHC. However, you could pull out the $25,000 out of your RRSP to make it roughly 20.6% down and bypassing the need for CMHC Insurance. Is it worthwhile to do so?
Scenario A: You utilize the Home Buyer’s Plan for a total down of $33,000. This brings your mortgage to $127,000. Each year you gain $13,000 and repay back part of your RRSP and the mortgage.
Scenario B: You only put $8,000 down and take a mortgage of $152,000 + CHMC. This brings your total mortgage to $156,788. Each year you gain $13,000 to repay back your mortgage. Your RRSP continues to accumulate money.
Scenario A | $127,000.00 | Scenario B | $156,788.00 | ||||
|---|---|---|---|---|---|---|---|
| Yr. | A's RRSP (9% RoR) | A's Non-Reg (7.65% RoR) | A's Mortgage Remaining | B's RRSP (9% RoR) | B's Non-Reg (7.65% RoR) | B's Mortgage Remaining (2.4% interest) | |
| 0 | $0.00 | $0.00 | $151,354.80 | $25,000.00 | $0.00 | $186,856.20 | |
| 1 | $1,666.67 | $743.01 | $141,264.48 | $27,250.00 | $42.92 | $174,399.12 | |
| 2 | $3,483.34 | $1,542.86 | $131,174.16 | $29,702.50 | $89.12 | $161,942.04 | |
| 3 | $5,463.51 | $2,403.90 | $121,083.84 | $32,375.73 | $138.86 | $149,484.96 | |
| 4 | $7,621.90 | $3,330.81 | $110,993.52 | $35,289.54 | $192.40 | $137,027.88 | |
| 5 | $9,974.54 | $4,328.62 | $100,903.20 | $38,465.60 | $250.04 | $124,570.80 | |
| 6 | $12,538.92 | $5,402.77 | $90,812.88 | $41,927.50 | $312.09 | $112,113.72 | |
| 7 | $15,334.09 | $6,559.10 | $80,722.56 | $45,700.98 | $378.89 | $99,656.64 | |
| 8 | $18,380.83 | $7,803.88 | $70,632.24 | $49,814.07 | $450.79 | $87,199.56 | |
| 9 | $21,701.77 | $9,143.88 | $60,541.92 | $54,297.33 | $528.20 | $74,742.48 | |
| 10 | $25,321.60 | $10,586.40 | $50,451.60 | $59,184.09 | $611.52 | $62,285.40 | |
| 11 | $29,267.21 | $12,139.27 | $40,361.28 | $64,510.66 | $701.23 | $49,828.32 | |
| 12 | $33,567.93 | $13,810.93 | $30,270.96 | $70,316.62 | $797.79 | $37,371.24 | |
| 13 | $38,255.72 | $15,610.48 | $20,180.64 | $76,645.12 | $901.74 | $24,914.16 | |
| 14 | $43,365.40 | $17,547.69 | $10,090.32 | $83,543.18 | $1,013.64 | $12,457.08 | |
| 15 | $48,934.96 | $19,633.10 | $0.00 | $91,062.06 | $1,134.11 | $0.00 |
Results:
NO! It is not worth it!
Even you only put 5% down, your investment return will beat out the higher CHMC cost. BUT…this is based on a strong assumption that your investing rate of return is 9% and interest rate remains low.
Part 3: Is it worth it if you only have 5% down payment and achieve 7% investment returns?
“But Savvy Buck!” You howl, “9% return on investment is much too generous! Majority of us cannot hope to achieve that consistently!”
Fine! Alright! Let’s tweak Part 2 so that our returns only amount to 7%.
RRSP: $25,000
Non-Registered: $8,000
Home Price: $160,000
Investment Rate of Return: 7% (or 5.95% after tax)
Annual Cashflow to Finance Debt: $12,500
Scenario A | $127,000.00 | Scenario B | $156,788.00 | ||||
|---|---|---|---|---|---|---|---|
| Yr. | A's RRSP (9% RoR) | A's Non-Reg (7.65% RoR) | A's Mortgage Remaining | B's RRSP (9% RoR) | B's Non-Reg (7.65% RoR) | B's Mortgage Remaining (2.4% interest) | |
| 0 | $0.00 | $0.00 | $151,354.80 | $25,000.00 | $0.00 | $186,856.20 | |
| 1 | $1,666.67 | $743.01 | $141,264.48 | $26,750.00 | $42.92 | $174,399.12 | |
| 2 | $3,450.01 | $1,530.23 | $131,174.16 | $28,622.50 | $88.40 | $161,942.04 | |
| 3 | $5,358.18 | $2,364.29 | $121,083.84 | $30,626.08 | $136.58 | $149,484.96 | |
| 4 | $7,399.92 | $3,247.97 | $110,993.52 | $32,769.90 | $187.63 | $137,027.88 | |
| 5 | $9,584.58 | $4,184.24 | $100,903.20 | $35,063.79 | $241.73 | $124,570.80 | |
| 6 | $11,922.18 | $5,176.21 | $90,812.88 | $37,518.26 | $299.04 | $112,113.72 | |
| 7 | $14,423.40 | $6,227.20 | $80,722.56 | $40,144.54 | $359.77 | $99,656.64 | |
| 8 | $17,099.71 | $7,340.73 | $70,632.24 | $42,954.65 | $424.11 | $87,199.56 | |
| 9 | $19,963.35 | $8,520.52 | $60,541.92 | $45,961.48 | $492.29 | $74,742.48 | |
| 10 | $23,027.46 | $9,770.50 | $50,451.60 | $49,178.78 | $564.53 | $62,285.40 | |
| 11 | $26,306.05 | $11,094.85 | $40,361.28 | $52,621.30 | $641.06 | $49,828.32 | |
| 12 | $29,814.15 | $12,498.00 | $30,270.96 | $56,304.79 | $722.16 | $37,371.24 | |
| 13 | $33,567.81 | $13,984.65 | $20,180.64 | $60,246.13 | $808.08 | $24,914.16 | |
| 14 | $37,584.22 | $15,559.74 | $10,090.32 | $64,463.35 | $899.12 | $12,457.08 | |
| 15 | $41,881.79 | $17,228.56 | $0.00 | $68,975.79 | $995.59 | $0.00 |
Results:
As you can see, it is still NOT worth it! Subtracting the RRSP amount from both sides, you will have nearly twice as much in your RRSP vs. Non-Registered from compounding returns at 7%.
Conclusion:
The Home Buyer’s Plan is NOT worth it if you are a savvy investor. The tax free compounding effect of your RRSP combined with high investment returns far outweigh the benefit of withdrawing it for lower interest & mortgage.
The only reason you should be utilizing the Home Buyer’s Plan is when you wish to buy a home but do not have 5% down payment saved up.
Hi Savvy,
Sorry to be commenting on a year old post, but this is exactly the type of analysis I was looking for. There seem to be a lot of articles out there recommending HBP without really giving proof that it’s worth the opportunity cost.
I noticed that in all your examples here you used 2.4% mortgage interest, which is extremely low and seems like it would play a big role. I did a quick rough comparison assuming interest rates were as high as 5%, and the difference between the mortgage payments at that rate was enough to bring the HBP buyer’s portfolio ahead of the CMHC buyer’s.
Do you think it’s safe to conclude that a low interest rate environment such as the one we’re in makes HBP less worth it, whereas with historically normal rates it may make more sense?
Johnathan
Hey Jon thanks for the comment!
Let’s assume that if interest rates were to suddenly rise to 15% in the next 2 years (absolute worst case scenario).
In that case, it would be terrible to get any sort of mortgage because your financing costs are way above your expected investment gains (9%).
Thus, you should either buy your home outright or use homebuyers plan.
So yes agreed that if interest rates were to rise suddenly, then my analysis is complete garbage.
However, since this post, interest rates have actually fallen…making HBP an even worse decision to take.