Canada’s RRSP Home Buyer’s Plan
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The Canadian Government’s Home Buyer’s Plan (HBP) was created to help Canadians, looking to purchase their first home, come up with the money they need to make a down payment. In Canada, if you’re looking to purchase a house you need to make a down payment that is at least 5% of the purchase price of the house. While 5% is the minimum required it is recommended that you make a 20% or higher down payment. Those who make a down payment that is less than 20% will have a high ratio mortgage and will require insurance.
This 20% rule can often make it more difficult for some Canadians to save enough money to make an appropriate down payment. The Home Buyer’s Plan aims to help out by allowing first-time home buyers to withdraw money from their RRSPs, tax-free, for a down payment (click here for more information about RRSPs).
Let’s take a look at the ins and outs of the Home Buyer’s Plan so you can make the best possible decision for your financial situation.
Need more help saving a down payment? Check out this article.
What is the Home Buyers’ Plan?
In order to participate in the HBP, you need to have an RRSP and have money saved within it. An RRSP is a type of savings account that is meant to help Canadians save for their retirements. Many people think of RRSPs as tax-free but in reality, they are tax sheltered. This means that when you go to withdraw from your RRSPs in the future you will be taxed.
The HBP allows you to withdraw from your RRSP and not get taxed. Basically, you’re giving yourself an interest and tax-free loans and therefore are required to pay back (to yourself) the amount you took from your RRSP.
How do I Know if I’m Eligible?
If you’re purchasing your first home then you are more than likely eligible to participate in the HBP. For those who have already owned a home or have lived in a house purchased by their partner, it is still possible to be eligible to participate in the HBP. If you’re looking to purchase a home then you can’t have owned (or lived in) a house within the last 4 years. Aside from this requirement, there are a few other conditions you need to meet:
- You need to be a Canadian citizen or a permanent resident.
- You’ll need to get a written agreement that states that you are purchasing a home that qualifies you for the HBP.
- You must be the primary resident of the house you’re purchasing.
- If you’ve used the HBP to purchase a house in the past you must not have any outstanding balances.
Is there a limit to the amount I can withdraw from my RRSP?
Yes, you cannot withdraw more than $35,000 to purchase a house through the HBP.
I want to buy a house with my significant other; can we both participate in the HBP?
Yes. You can both withdraw up to $35,000 from your RRSPs.
I’m eligible to participate in the HBP but my significant other isn’t, how will this affect us?
The person who is eligible to participate in the HBP can still withdraw up to $35,000 from their RRSP even if the other person who they are buying a house with is not eligible.
What can I expect from the HBP process?
The bank or financial institution that you’re working with will be able to help you through the HBP process. But here are a few important points to should know and keep in mind:
- The money that you plan to withdraw from your RRSP must be in your RRSP account for at least 90 days.
- You must make the withdrawal from your RRSP within 30 days of taking possession of your house. After 30 days the money you’ve withdraw won’t be eligible to use with the HBP.
- You’ll need to fill out a T1036 form; your lender should be able to help you with this.
Can I Back Out of The HBP?
If you withdrew the money from your RRSP and purchased or built a qualifying home then you cannot back out of the HBP.
Is there ever a right time for you to buy a house? Read this article.
Repaying Your RRSP Withdrawal
The money you withdraw from your RRSP in order to participate in the Canadian HBP is like a loan, you’re technically lending yourself the money to make a down payment on a home. This means that you need to pay it back.
- You won’t need to start repaying your RRSP withdrawal until 2 years after the initial withdrawal.
- After the 2 year grace period you’ll have a maximum of 15 years to repay the full amount back into your RRSP.
- Keep in mind that the government treats this as a loan, therefore will be keeping track of you and your payments.
- If you don’t make the minimum payments, which is the total amount you took from your RRSP divided by 15, the amount you don’t repay will be taxed as income.
A Closer Look at How the HBP Repayment Works
Let’s say that you were able to withdraw the maximum amount, $35,000, from your RRSP in order to make a down payment on your home. Because the whole point of the HBP is to get the money tax free, the total amount of money you need to pay back is actually $35,000. You need to fully repay that amount with 15 years. Here’s how you can calculate your minimum yearly payments.
$35,000/ 15 (years) = $2, 333.33 per year
Keep in mind that this is simply the minimum amount you are required to pay. If you have the money you can always pay it back sooner.
Looking to pay off your mortgage early? Everything you need to know here.
How to Make the Right Choice for You
Whether or not you choose to use the Home Buyer’s Plan depends greatly on your financial situation, your financial needs and how you think your finances will look in the future. While we can’t make the decision for you, here are a few things you definitely need to consider before you make your final decision.
- Will you be able to keep up with the yearly minimum payment?
- Is it very important for you to have a larger down payment to avoid high ratio mortgage insurance?
- Is participating in the HBP the only way you’ll be able to afford a reasonable down payment?
- Is the tax-free growth that your RRSP creates more advantageous than a larger down payment?
Purchasing your first home means committing to a large financial burden, the Canadian Home Buyer’s Plan can be a great way to offset some of this burden. Again the choice is a personal one; just make sure you weigh the pros and cons based on your financial situation.
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Margaret Johnson is in the business of helping Canadians tackle their debt, deal with credit issues, and regain control of their finances.