With all the publicity about the new home renovation tax credit in the federal budget, one item overlooked was the move to increase the ceiling limit on the very successful national Home Buyers’ Plan (HBP). The plan introduced in 1992 allows individual Canadians to use funds drawn from their RRSPs to purchase a home. The money withdrawn has to be paid back to the RRSP over a number of years.
The passage of the budget showed the Canadian Real Estate Association’s (CREA) long-time effort to convince all federal MPs of the merit of increasing the HBP’s ceiling paid off. You now can draw up to $25,000 from your RRSPs towards a down payment on a home. For couples, it increases from $40,000 to $50,000.
Real estate prices have been rising since 1992, which made for a solid case to increase the ceiling limit from $20,000 to $25,000.
“The change announced to the popular Home Buyers’ Plan will help Canadians who want to own their own home, and do it in a responsible way that it is not a major drain on taxpayers,” said CREA president Calvin Lindberg
In response to the budget, CREA noted that after 16 years, the HBP did not have the same impact and relevance with the original $20,000 limit remaining in place. CREA said $20,000 represented 13.3 per cent of the average house price in 1992, but only 6.5 per cent in 2008.
It has also helped stimulate economic activity in this country. A study conducted for CREA by the Altus Group, demonstrated that each real estate transaction in Canada generates $32,200 in ancillary consumer spending. This translates to $13.99 billion in consumer spending based on the 434,477 transactions that happened in 2008. It also shows 94,700 full-time jobs were created annually by this ancillary or spin-off activity.
The HBP has made a difference to thousands of Canadians.
The national Home Buyers’ Plan encourages first-time home buyers to save for a down payment. It helps them build equity rather than debt by encouraging savings and maximizing down payments. The claim is sometimes made that low interest rates and more flexible mortgage insurance options provide the necessary support for homeownership. Those measures are important, but they facilitate borrowing and larger levels of debt. By emphasizing a down payment, the Home Buyers’ Plan helps the buyer minimize the level of debt over time.
The plan has proven highly successful since it was introduced in 1992. In the 2008 budget, the federal government introduced Tax Free Savings Accounts (TFSA) to facilitate savings for “needs,” including a home purchase. While these programs can provide benefits to homeownership, only the Home Buyers’ Plan effectively combines saving for retirement and saving for a home.
An estimated two million plan users have borrowed more than $15 billion of their own savings from RRSPs since the plan was introduced in1992. The plan has helped in more than 900,000 home purchases, including 53,000 homes bought in 2006 (Source: Canada Revenue Agency).
Homeownership is the cornerstone of retirement for the majority of Canadians. Before the plan was introduced, many young people had to choose between saving for retirement or saving to purchase a home. The plan actually results in Canadians saving for retirement earlier because of their interest in purchasing a first home. The requirement to repay the RRSP over 15 years to avoid taxation is a powerful incentive for repayment. The integrity of the RRSP program is protected.
Annual repayments over 15 years of RRSPs are a fundamental feature of the plan. The latest statistics show homebuyers are repaying their loans under the HBP. Repayments as a percentage of withdrawals under the HBP amounted to 41.3 per cent in 2004, 49 per cent in 2005 and 59.9 per cent in 2006.
When the Home Buyers’ Plan was introduced, the federal government was right to resist proposals to allow borrowing from RRSPs for other purposes, including education, travel and vehicles. Only homeownership is compatible with retirement security. When they come into force in 2009, Tax Free Savings Accounts (TFSA) will address these other proposals by allowing annual $5,000 taxable contributions that are then tax-sheltered and may be withdrawn without tax for any purpose.
Since the Home Buyers’ Plan was introduced in 1992, the Consumer Price Index has climbed more than 27 per cent and the MLS® average home price has risen 66 per cent, good reasons highlighted by CREA to convince the federal government of the merits of increasing the RRSP withdrawal limit to $25,000 per individual first-time home buyer.