You've heard about, you've read about it, but what does it all mean? The Canadian government introduced this first-time homebuyer benefit some time ago to boost the overall economy. See, if you buy a home, there's a lot of benefits, not only to yourself but to numerous businesses - ranging from banks, to real estate agents, to home inspectors, to local hardware stores you'll be visiting to fix up your house - all this means tax revenue to the government. But to the real issue...
The regulation lets you borrow up to $20,000 per person from your RRSP, or a total of $40,000 for a couple. When you take the money out of the RRSP, it won't be taxed. But you'll need to pay it back over 15 years starting two taxation years from the year of purchase. For example, if you buy a home in 2003 and borrow $20,000 each, your first payment will need to be in time for your 2005 tax return (or before Feb 28, 2006) and be a minimum of $1,333 each. Now the real question is "is this really a benefit to you the buyer?"
The upside of borrowing is that a) this may reduce or eliminate the CMHC insurance fees (assuming you put less than 25% down) and b) this will reduce your monthly mortgage payments and c) this may help cover some of the closing costs.
The downside is that you'll need to pay back this over the next 15 years, but of greater impact is that this money will now no longer be growing with compounded interest and the value of your RRSP will be reduced for your retirement years.
So what do you do? Well, I've done some math for you. Say you're 30 years old today, and you jointly borrow the maximum or $40,000 and pay it back over the next 15 years as per CCRA rule (the government). When you're 65 the value of your RRSP, assuming 7% return per year, will be $175,000 less than if you had not taken out the $40K. Now, that's a chunk of money!
Now, how much interest did you save, understanding that your mortgage was lower than if you hadn't borrowed? Assuming a $260,000 mortgage instead of a $300,000 mortgage, you would have saved about $70,000 in interest over a 25 year period by reducing your monthly mortgage payment by about $230.
So, what's the bottom line? Well, you could argue that it depends what you do with these monthly savings of $230. If this is re-invested then both options are roughly equivalent. If you don't reinvest it, and odds are you won't, then your RRSP just took a $175K dive in value. At the end of the day, it depends if you need the extra $230 monthly. If you don't, leave the $40K in the RRSP. It'll be much happier. And you'll be happier when you retire.
