I’ve always been of two minds about the use of the Home Buyers’ Plan (HBP).
It’s the program that allows you to borrow money, interest-free, from your registered retirement savings plan (RRSP) for what is usually, but not always, a first-time home purchase.
On the one hand, I understand the desire of young people to own their own home, especially if they have children. The quiet suburban setting with a back yard and a swing set has been the dream of many young parents.
But the other side of this equation is the loss of tens, and perhaps hundreds, of thousands of dollars in retirement revenue. That’s a hefty price to pay for owning the roof that’s over your head.
Let’s back up a little here. When RRSPs were created in 1957, as one of the final acts of the Louis St. Laurent government, they were intended to be personal pension plans, pure and simple.
Over the years, their importance in retirement planning has increased as the number of Canadians covered by employer pension plans has steadily declined. According to the latest data from Statistics Canada, only 37.5 per cent of workers were members of a registered pension plan in 2016, down from 37.8 per cent the year before. Most of those with plans work in the public sector (88 per cent); only 23 per cent of those in the private sector have any pension benefits.
For those people, the RRSP is the main source of retirement savings. But the politicians have muddied the waters over the years by allowing people to dip into their plans for other purposes, including buying a house and furthering education.
The Home Buyers’ Plan is a classic example of political expediency. During the recession of the early 1990s, the Canadian housing industry was in dire shape. The real estate industry lobbied the government of Brian Mulroney for help and the response was the creation of the HBP. The plan was supposed to be temporary – two years, originally.
But it became so popular that no government was willing to abolish it. Now, 27 years later, the Liberals have made it even more tempting by raising the borrowing limit to $35,000 (from the original $25,000). That’s $70,000 for a couple.
This budget initiative is part of a package designed to make it easier for millennials to buy a home in pricy markets like Toronto and Vancouver.
I suggest you be wary – this budget “gift” contains a poisoned pill.
The HBP basically involves stealing from your future retirement income to pay for an enhanced lifestyle today. Because of the many variables involved (age, rate of return, amount of contributions, tax bracket, etc.), it is difficult to estimate the cost to an RRSP of making use of this program. But simulations I have run in the past showed that the end value of an RRSP would be reduced by tens of thousands of dollars at the old $25,000 limit. Adding another $10,000 to that obviously diminishes the amount of retirement money even more, leaving less to fund RRIF pay outs in retirement.
The reduction in retirement income isn’t the only problem with the HBP. The plan encourages Canadians to take on even more financial liability at a time when the national household debt to income ratio is at a lofty 171.1 per cent. That means for every $100 of income we receive, we owe $171.10.
That’s extremely high – so much so that less than a week before the budget speech, Moody’s Investor Service warned that Canada’s banking system is facing a growing threat from rising consumer debt. Moody’s isn’t alone – the International Monetary Fund, the Bank for International Settlements, and the OECD had all issued similar warnings previously.
The Liberals paid no attention. In an attempt to win votes from millennials in an election year, they’ve made it even easier to accumulate debt by borrowing more from your RRSP (and from CMHC) to help finance an even bigger liability, a mortgage.
Short-term, perhaps it will pay off. Many young people want to own rather than rent and the HBP has always been a popular way to help obtain a mortgage (it is estimated that more than $30 billion has been borrowed using the plan).
But the longer-term implications – a higher debt load, loss of tax-sheltered income within the RRSP, and reduced retirement income at the end of the day – need to be carefully considered.
That said, the reality is that most people are more concerned about the present than about the future. So, expect a lot of young couples to snap up the government’s offer and borrow more to own a home – and a mortgage. Our debt-to-income ratio is about to become even more scary.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.