How Effective is the Home Buyers’ Plan in Canada’s Biggest Cities?
It’s no secret that it’s financially tough to purchase a home in one of Canada’s largest urban centres, especially as home prices have been steadily on the rise in recent years. To take some of the pressure off of first-timers, the federal government offers several programs to ease affordability.
One of the most well-known is the Home Buyers’ Plan (HBP). First introduced in 1992, this program allows borrowers to withdraw up to $35,000 of saved funds from their RRSPs to use toward a down payment on a principal residence. Buyers must pay themselves back in annual installments over 15 years, or else be taxed on the funds at their marginal rate.
Is the HBP Out of Touch with Today’s First-Time Buyer?
However, the plan has faced criticism that it only helps high-income Canadians and that it’s less likely to be utilized by the first-time buyer segment. For instance, only 35% of Canadians contribute to RRSPs, according to Statistics Canada, and the savings tool is most often used by households who have at least one individual bringing in over $80,000 after-tax and who is over 35 years old. Only about 20% of earners who make under $50,000 of after-tax income contribute.
That makes sense because the tax advantage of the RRSP only really kicks in when you make a high income. Since, however, the median after-tax household income across Canada is around just $60,000, a lot of Canadians are not going to be able to utilize the HBP as effectively.
For this reason, Tax-Free Savings Accounts (TFSAs) can be a far more useful tax-sheltered savings vehicle for these Canadians — there is complete flexibility to withdraw, you do not have to pay yourself back when you do so and contributions are not dependent on earned income. The one downside is that there is a restrictive annual limit of $6,000, though any unused portions are rolled over each year. (For example, someone contributing to a TFSA for the first time in 2020, and who has been eligible to do so since its 2009 inception, would be able to put up to $69,500 in the account.)
How Long Would it Take to Max Out the HBP?
It’s most likely that home buyers will have to use a combination of the HBP and other savings to put the appropriate amount down, depending on which city they choose to buy in. But how long does it actually take to save up $35,000 in an RRSP? Is it feasible for most Canadians to do so?
To find out, Zoocasa analyzed individual income thresholds in 14 regions across Canada, based on 2017 tax filings from Statistics Canada, assuming the income was earned income, eligible to create RRSP contribution room, and that individuals contributed the maximum to their RRSP annually (18% of earned income, to a maximum of $26,500).
Zoocasa divided the households into thresholds: those in the top 10% of filers, those in the top 25% and those in the top 50%.
The study finds that for those earning median incomes (top 50%) across Canada, it would take between 4.3 – 6.0 years to save $35,000 for the HBP.
For those in the top 10% of tax filers in Vancouver, earning over $99,500, it would take only two years to max out their HBP. The top 10% of tax filers in Calgary earn $122,300 (the highest in Canada) and for them, it would take just 1.6 years to save $35,000 in their RRSP. In Toronto, the top 10% earn $101,700 and it would take 1.9 years (and you would need a lot more than $35,000 to afford average Toronto homes for sale!).
For those in the top 25% of tax filers and earning $63,000 in Vancouver, it would take just over three years to save $35,000 in their RRSP if they contributed the maximum amount allowed to their account. In Calgary, the same 25% earn a bit more at $75,700, and so it would take just 2.6 years. In Toronto, the top 25% earn roughly the same as in Vancouver and the time to save is equal as well.
Top 50% of Income Earners Priced Out of Biggest Markets
As for the top 50% of tax filers — they just don’t earn enough for the HBP to be truly advantageous. In Vancouver, they make just $35,100 and it would take them 5.7 years to save $35,000 in their RRSP. In Calgary, they earn $40,900 and it would take them 4.8 years. In Toronto, the top 50% make just $32,600 and so it would take them a full six years to save the max amount allowed for the HBP.
Not surprisingly, those with the highest incomes will have the best luck with saving up in their RRSP, and those in the top 50% or below of incomes will have to be dedicated and frugal to manage to contribute the full amount to their RRSP. However, those focusing their home searches outside of the major urban centres will see their dollars stretch further.
Overall, buyers will have the best luck in the Waterloo real estate market with its high paying tech jobs, in Ottawa, with its high paying federal jobs, or in Calgary, with its high paying oil and gas jobs. These three cities are lucky to have a strong economic landscape as well as plenty of houses under $500,000. There, the HBP plan will go the furthest and is most likely to help first-time homebuyers achieve their dream of getting on the property ladder.
To check out how long it would take to save the maximum funds in the HBP in your city, see the infographic below.
Zoocasa is a full-service brokerage that offers advanced online search tools to empower Canadians with the data and expertise they need to make more successful real estate decisions. View real estate listings at zoocasa.com or download our free iOS app
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