Speaking in Vancouver August 12, Prime Minister Stephen Harper vowed that if reelected, the amount of money first-time home buyers could withdraw from their RRSPs, tax free, to be used as downpayments would be increased from $25,000 to $35,000.
The move is being lauded by some as a good way to get more people into the real estate market – although it could create a huge problem for some buyers as not everyone realizes this money has to be paid back, according to Michael Thorne, certified financial planner at Thorne Financial Planning.
“Paying it back is definitely the issue that most people don’t realize they have to do, in my experience,” Thorne told Business in Vancouver.
Under the government’s current rules, withdrawals have to be paid back into the borrowers’ RRSPs over a 15-year period, with repayments starting in the second year after the year the money was taken out. If the amounts are not replaced at a rate of 1/15 of the total withdrawal, per year, tax will need to be paid on that amount – at the buyer’s current tax rate.
This could mean paying a lot more personal income tax if the original amount was put in – and a tax deduction taken – at a time when the buyer was in a lower tax bracket.
“If this gets people to effectively pay tax on the money coming back out because they don’t pay it back, they are going to be paying a significantly higher tax rate, so it could be detrimental from that point of view,” Thorne said.
Thorne also pointed out that this increased withdrawal amount would have different effects in different areas across the country.
“One of the things that is a problem with this is $35,000 for someone who is in Nova Scotia or Winnipeg is more than enough for a downpayment,” he said. “But out here it’s a downpayment on a house maybe in Chilliwack, but it’s not going to do anybody any good who’s trying to buy a condo in North Van or Kits or Yaletown.
“Maybe a bachelor apartment.”
The increased limit could have overall benefits for the market, however, and there will be advantages for some buyers, said Cameron Muir, chief economist at the British Columbia Real Estate Association.
“In terms of the overall market implications, any time you provide stimulus for first-time buyers to get into the marketplace, that will likely boost the sales level,” Muir said. “Any help for first time buyers trying to squeeze into the market is going to be helpful for the overall housing market.”
He pointed out that it is unclear how many people would actually benefit from this as it would be difficult to estimate the number of home buyers who have $35,000 in available RRSP money to put into the housing market.
“Certainly not all first-time buyers have those funds invested in RRSPs, simply because they are typically younger and to buy a house to begin with, they’ve probably had to save up a significant amount on their own.”
Thorne agreed that it could benefit some buyers, but said the move could have even more unintended consequences.
“[The government] comes out on one hand and says it is trying to restrict lending to people who are on the margins, but if you are having to take money out of your RRSPs it kind of indicates that you are also maybe not as flush as you should be to buy a house,” Thorne said.
