Low interest rates and a relatively stable Canadian economy have contributed significantly to the booming real estate market here in Ontario. For a number of individuals the low rates have provided the opportunity to finance their first home purchase. Of course, the challenge in this process is coming up with the required down payment to qualify for the mortgage. What options are available for the first time buyer to do so? Family loans are often a part of the source but for most it is a matter of building up a savings account over a period of time to achieve this goal-given that such a plan is done with after tax dollars it could take a number of years.
The Canada Revenue Agency has established two programs that do provide assistance to individuals in creating the savings necessary for a down payment. The RRSP Home buyers plan, created in 1992 allows and the Tax Free Savings account (TFSA) created in 2009. Both programs have their pros and cons when it comes to accumulating the funds. For example an RRSP allows for quicker growth as it is done with pre-tax savings while the TFSA savings are accumulated using after tax savings. But because the TFSA uses after tax savings any withdrawal for a home purchase is completed with no future tax consequences. As well, the use of the TFSA entitles the investor to recontribute to the plan the year after the withdrawal.
On the other hand the RRSP home buyers plan will affect future cash flows as the amount withdrawn must be repaid to the RRSP over a 15 year period. As well, the use of the RRSP for this purpose uses up available contribution eligibility and the repayments to the plan are not tax deductible. One must also consider the limits to each of these alternatives when deciding an which savings vehicle to utilize. At the end of 2015 the HBP withdrawal limit is only $25000 (there is speculation that it may be increased to $35000). When one considers the fact that house costs have increased by over 200% since 1992 the HBP limit has not kept up with price increases. On the other hand TFSA contribution limit now sits at $46500-this allows for a greater cash accumulation which in theory allows for a greater down payment and a lower mortgage requirement.
Which method is better? When asked I lean toward the use of the TFSA for this purpose because of the points noted above. A combination of the two programs is definitely possible but I recommend that less emphasis be put on the use of the HBP. Please ensure to consult your financial advisor when it comes to determining the program that offers you the best results.