The Canadian Government initiated RRSP Home Buyers’ Plan (HBP) allows withdrawal up to $35,000 of their RRSP for down payment as first-time home buyer. It’s known as Home Buyer RRSP Plan.
Since the real estate market is exploding, RRSP Home Buyers plan gives first-time home buyers a great opportunity to withdraw from their RRSP fund. Are there any disadvantages? This article will discuss everything important to think about before opting for the RRSP Home Buyer Plan.
Indeed, the rising house costs and stricter lending requirements make it difficult for first-time Canadian homebuyers to score in today’s market. However, the government has initiatives to assist first time home buyers in realizing their ambition of owning a home.
What Are the RRSP Home Buyer Disadvantages?
Here are the 4 RRSP First-Time Home Buyer Disadvantages:
- Strict and Complex Payment Rules
- HBP Repayments Are Non-Deductible
- Miss out on Future Growth
- Being in Long-term Debt
- Repayment Obligations May Affect Mental Wellness
1. Strict and Complex Payment Rules
It’s necessary to understand the repayment regulations linked with RRSP withdrawals before any withdrawal from the RRSP for down payment.
Repayment rules for RRSP home buyers’ plan:
- The buyers must repay their withdrawals within 16 years.
- Every year, the lender must repay at least 1/15 of the amount borrowed.
- The buyer must begin returning the money the following year after the withdrawal.
- The annual minimum amount needs to be refunded before making any normal contribution to RRSP.
Is there a penalty for failing to pay the minimum annual HBP payment?
What if someone has a challenging financial year and cannot make their minimum payments?
However, the funds still need to be repaid!
It’s one of the significant RRSP Home Buyer Disadvantages, I figure. Somehow if the lender can’t make a minimum contribution for a year, the same amount to be included on your tax return. So, without an argument, it can be said that these repayment rules are the most significant RRSP Home Buyer Disadvantages.
2. HBP Repayments Are Non-Deductible
Any RRSP contribution specified as payback cannot be claimed as a deduction because one had already deducted their contributions when they first contributed to their RRSP. So, yes, that’s another RRSP first-time home buyer disadvantage.
When thinking about it, it’s entirely reasonable that one can’t reclaim their repayments, but if you as a lender rely on tax rebates as a source of additional money every year, you might be in danger.
Why? Because, depending on how much you can afford to rebate, their RRSP contributions may not be able to reduce your taxable income. And, according to the rules, it’s necessary to first refund the annual minimum amount, which is not tax-deductible before you can make any regular contributions to the RRSP.
3. Miss out on Future Growth
If you’ve succeeded in depositing $35,000 (the HBP withdrawal maximum) or more to your RRSP, you should be proud of yourself because it’s not easy.
When determining whether or not to withdraw this money to use as a down payment on the first home, consider how much it will cost in the long run. Consider the factor if you want to retire at 65. Lowering your RRSP contribution now and returning it later reduces the amount of time your money has to grow and compound.
Compound interest, in other words, will have less time to work its magic. Yes, compound interest is a fantastic concept. And with compound interest, it’s shocking how much money could be saved in these couple of years.
4. Being in Long-term Debt
RRSP funds may be easy to claim, but claiming RRSP funds means being stuck with debt for 15 years. For many people, that is a very long time to maintain their debts. Furthermore, there is added pressure to pay off all the debts before retirement so that funds are available during retirement.
5. Repayment Obligations May Affect Mental Wellness
As previously stated, one of the most significant RRSP Home Buyer Disadvantages is that it functions nearly like a personal loan. In other words, they owe their RRSP money. The strict repayment conditions might wear on one’s emotional health over time. Debt alone can trigger some severe emotions in a human, like anger, depression, and stress.
Consider thinking about the feelings when owing money from someone or anything. That’s how it feels like living in debt for 15 years, depending on how long it takes to repay the debt?
Not only that, but if the effects are severe enough, you may come to detest the house you bought as a result of the emotional toll it has taken on you. (Keep in mind that you still have to pay your mortgage!)
Even though there are 16 years to pay back RRSP, you must refund at least 1/15th of your total withdrawal each year.
While it’s alright to repay more than this each year, neglecting to repay the minimum may cost you tax, and the ongoing necessity to make minimal payments may begin to weigh on you.
That being said, if you don’t like the idea of borrowing money or getting into debt, in that case, you might want to reconsider utilizing your RRSP to buy your first house.
Now, let’s emphasize that this is not the same as going into debt. But still you are borrowing money to support a purchase, and failing to repay the borrowed money will cost you more money.
With all the RRSP home buyer disadvantages, it’s still a great asset and a fantastic way to decrease the down payment amount as a first-time home buyer. But someone should be cautious about withdrawal and repayment of RRSP funds. We recommend having a solid repayment plan before considering RRSP First Time Home Buyers Plan.