Home Buyers’ Plan: Using Your RRSP for a First-Time Down Payment
With Canadian housing prices at all-time highs, it’s harder than ever for first-time homebuyers to enter the housing market. One of the problems is that as housing prices rise, so does the amount you need for a down payment.
Thankfully, the Home Buyers’ Plan (HBP) is available to lower the financial pressure of saving for a down payment. But how does the HBP work, and is it the right strategy for you?
In this article, I’ll explain the various ins and outs of the HBP to help you make an informed decision.
What Is the Home Buyers’ Plan (HBP)?
The Home Buyers’ Plan is a Canadian government-sponsored program that allows first-time homebuyers to withdraw funds from their Registered Retirement Savings Plans to buy or build a qualifying home for themselves or a related person with a disability. The funds are withdrawn without withholding tax but must be repaid into the RRSP over 15 years.
- Eligible for qualified first-time home buyers
- Withdraw up to $35,000 from your Registered Retirement Savings Plan with no withholding taxes
- Your spouse can also withdraw up to $35,000 if purchasing together
- Funds must be repaid within 15 years, or penalties will apply
- Funds must be in RRSP for at least 90 days before the withdrawal
HBP Eligibility Conditions
To participate in the Home Buyers’ Plan, you must meet certain conditions:
- You must be a resident of Canada at the time of the RRSP withdrawal.
- You must be considered a first-time homebuyer – neither you nor your spouse has owned a home (principal residence) in the previous four years.
- You must have a written agreement to buy or build a qualifying home (completed offer to purchase)
- The home must be a qualifying property (principal residence) in Canada.
- You must repay the RRSP funds within 15 years
If you’re purchasing a home for a related person with a disability, additional eligibility conditions may apply.
Withdrawal Limits and Process
As mentioned, you can withdraw up to $35,000 from your RRSP toward your new home. If you’re purchasing the property with your spouse, each spouse can withdraw up to $35,000 for a combined maximum of $70,000.
You can make a single withdrawal, or a series of withdrawals, providing the total withdrawal amount doesn’t exceed the limit. Note that all withdrawals must be received within the same calendar year.
HBP Withdrawal Process
To access your RRSP funds, contact your RRSP issuer and let them know that you wish to make an HBP withdrawal. They will have you complete Form T1036 (Home Buyers’ Plan Request to Withdraw Funds from an RRSP), process the withdrawal, and ensure no taxes are withheld.
Understanding the Repayment Period and Schedule
When you withdraw from your RRSP under the HBP, the Canada Revenue Agency (CRA) sets out a 15-year repayment period for the funds.
This repayment period starts in the second calendar year following the year you made the withdrawal. Each year, you’ll receive an HBP Statement of Account from the CRA outlining the minimum amount you need to repay for the following year.
Calculation of Annual Repayment Amount
Calculating your annual repayment amount is simple. All you need to do is divide the total amount withdrawn by fifteen.
Let’s say you withdrew the maximum amount of $35,000. In that case, you’d have to return $2,333.33 ($35,000 % 15) to your RRSP each year. You cannot claim an HBP repayment as an RRSP deduction for tax purposes, as this is a repayment of funds for which you previously received a deduction.
Note: Always remember to make the minimum repayment in a given year. If you don’t, the amount will be considered RRSP income, and you’ll have to pay income tax.
HBP Program Eligibility
Let’s look closer at the qualifying criteria for the Home Buyers’ Plan. It’s essential to follow the rules closely to ensure you qualify; otherwise, the penalties can be steep.
Definition of a First-Time Homebuyer
To qualify for the Home Buyers’ Plan, you must be a first-time home buyer. This means that you, or your spouse or common-law partner, must not have owned a principal residence in the same calendar year or any of the four preceding calendar years.
If you’ve previously owned a home but not within the four years, you can still be considered a first-time buyer.
Rules Surrounding a Qualifying Home
The home you’re buying or building must be your principal residence, and you should have a written agreement to buy or build it. You cannot participate in the HBP program to purchase a secondary home or an investment property, such as a rental property.
The HBP extends to those looking to buy or build a home for a disabled relative. Under these circumstances, certain eligibility rules still apply when participating in the HBP, including that the qualifying home must be acquired before October 1 of the calendar year following the year of the RRSP withdrawal.
The Home Buyers’ Plan is a valuable program that makes buying a home a more affordable proposition for many Canadians. However, it’s important to remember that there can be drawbacks to participating in the HBP.
One of them is opportunity cost. Withdrawing a lump sum of money from your RRSP, even temporarily, may result in you having less money at retirement, as less money is invested in your RRSP account, benefitting from tax-sheltered growth.
Another drawback is that you must repay the money, so you need to plan to make those payments for up to 15 years. That’s not a big deal if you’re only withdrawing $5,000 or $10,000, but if you and your spouse are taking the maximum combined withdrawal of $70,000, you’ll need to repay close to $5000 per year for 15 years, a significant amount.
While I don’t think this should prevent you from participating in the HBP, it’s a good idea to look at your down payment options before you take the plunge.
Home Buyers’ Plan FAQs
Is it a good idea to get a Home Buyers’ Plan?
A Home Buyers’ Plan (HBP) can be a helpful financial tool when purchasing your first home. Think of it as an interest-free loan. But before you participate, consulting with a financial professional who can advise you on your situation never hurts.
How long does it take to repay a Home buyer’s Plan?
You will need to start repaying the HBP beginning the second year after the year of your withdrawal. The total repayment period is 15 years. Each year, you must repay 1/15th of the total amount you withdrew from your RRSPs under the HBP. If you do not repay the required amount in a given year, the Canada Revenue Agency will consider the amount as taxable income for that year.
What is the 4-year rule for HBP?
The 4-year rule states that you may not have owned a home that you or your spouse or common-law partner occupied as your primary residence during the four-year period before the withdrawal date.
This four-year period begins on January 1 of the fourth year before the year of withdrawal and ends 31 days before the withdrawal date. This rule ensures that the HBP is used solely by first-time homebuyers or those purchasing a home for a related person with a disability.