Why higher HBP limits may not be good news for RRSP holders

First-time homebuyers might want to consider the consequences of a ‘poisoned pill’ within the new benefit

Why higher HBP limits may not be good news for RRSP holders

The new forms of financial relief offered in the federal budget — changes that cynics would read as a Liberal attempt to garner votes in an election year — included policies that would help Canadians in their struggle for homeownership. But one of the new benefits offered might come at an outsized cost.

“The Home Buyers’ Plan [HBP] is a classic example of political expediency,” wrote Gordon Pape, editor and publisher of the Internet Wealth Builder and Income Investor newsletters, in a column for the Toronto Star.

Recalling the recession of the early ‘90s, he explained that the HBP was introduced by the Mulroney government as a lifeline to Canada’s struggling real-estate industry, and was only supposed to be in place for two years. But because it became so popular, no administration had the political will to pull the plug. Fast-forward 27 years, and the current Liberal government sweetened the deal by raising the original $25,000 borrowing limit to $35,000, which works out to $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,” Pape noted. “I suggest you be wary – this budget ‘gift’ contains a poisoned pill.”

He explained that by taking advantage of the HBP, Canadians run the risk of curtailing their future retirement income for the sake of an enhanced lifestyle today. He acknowledged that estimating the impact of using the HBP on an RRSP can be difficult because it involves a myriad of factors, but pointed to past simulations he has conducted showing that the end value of an RRSP would be lowered 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.”

Using the HBP, he added, is problematic given a national household debt-to-income ratio of 171.1%; according to Statistics Canada, that figure reached a record high of 178.5% in the fourth quarter last year.

“[L]ess 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,” Pape said, adding that the  International Monetary Fund, the Bank for International Settlements, and the OECD had all published similar assessments.

He noted that the HBP is a popular tool among many young people who’d rather own than rent, with an estimated $30 billion having been borrowed through the plan. But he also stressed the importance of considering the higher debt load, the loss of tax-sheltered income within the RRSP, and lower retirement income at the end of the day.

“On the one hand, I understand the desire of young people to own their own home, especially if they have children,” he said. “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.”   


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