Are you scraping together a down-payment for your first home in today’s red-hot real estate market or looking for creative ways to save money on your mortgage? Do you own an RRSP? If the answer to both questions is yes, The Home Buyers’ Plan (HBP) is worth a look.
Before you take the plunge, here are the answers to questions worth asking.
- The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP for a downpayment on your first home.
- You’ll have 15 years to pay the money back into your RRSP, with the first of 15 equal annual payments due the second years after you withdraw it.
- It’s important to follow the government’s repayment schedule. Otherwise, the CRA will treat your RRSP withdrawal as income, and you’ll take a tax hit.
How does the Home Buyers’ Plan (HBP) work?
Designed to make home ownership more affordable, you can borrow up to $35,000 from your Registered Retirement Savings Plan (RRSP) to put towards buying or building your first home with the Home Buyers’ Plan (HBP). If you are buying the house with your spouse, each of you can withdraw $35,000 from your respective RRSPs, for a total of $70,000.
Think of HPB as a loan program for people with RRSPs. When you participate, your RRSP withdrawals are not taxed as income AND you’ll have a smaller mortgage, which will save you thousands of dollars in interest over time.
TIP: Careful not to mix The Home Buyers’ Plan (HBP) up with the The Home Buyers’ Amount (HBA), which is a non-refundable tax credit that first-time homeowners, and homeowners with disabilities, to claim up to $5,000 in the year when they purchase a home.
How do I qualify for the Home Buyers’ Plan (HBP)?
To participate in the Home Buyers’ Plan, you must meet the following conditions:
- Be a Canadian resident.
- Be a first-time home buyer.
- Enter into a written agreement to purchase or construct a qualifying home for yourself or a person with a disability.
- Make all RRSP withdrawals in the same tax year.
- Designate the house as your principal residence and move in no later than one year after buying or building it. There is no time limit as to how long you are required to live there.
- The property must be located in Canada.
What is a qualifying home under the HBP?
As long as you meet the eligibility criteria, all types of homes qualify, including:
- Mobile homes
- Apartment units
The possible exception is co-op housing, depending on the fine print around whether you own a share of the housing unit or just the right to tenancy.
How complicated is the paperwork, and how quickly can I access the money?
To make a withdrawal, all you have to do is fill out the T1036 Home Buyers’ Plan (HBP) Request form and give it to your RRSP provider who will then deposit the funds into your bank account. From here, you can withdraw the funds as a lump sum or as a series of withdrawals.
Pretty simple, right? The only thing to keep in mind is the consequences of NOT withdrawing the money quickly enough. Specifically:
- All withdrawals must be made in the same calendar year.
- If you choose, you can make the withdrawal AFTER you buy or build the home- as long as you do it within 30 days of taking ownership.
If you don’t follow these guidelines, the funds won’t be eligible for the HBP. Not to mention, the government will treat the amount as taxable income, and you’ll be taxed accordingly, which defeats the purpose of the plan.
TIP: You can’t withdraw funds from a locked-in RRSP (i.e: from your former employer’s pension plan) or a group RRSP. If you previously participated in the HBP, your previous balance must be at zero by Jan 1 in the year you plan to participate again.
Can I withdraw from more than one RRSP?
Although you can borrow from several RRSPs (as long as they’re all in your name), the money has to be in your RRSP for at least 90 days before you can withdraw it. Or else, it may not be tax-deductible for that year.
What is the Home Buyers’ Plan (HBP) Repayment Process?
Generally, you have up to 15 years to pay the amount back into your RRSP, with the first payment due two years after you withdraw it. From here on in, you must pay off a minimum of 1/15 of the loan each year. Here’s an example of what the repayment process looks like.
TIP: If you borrowed the full $35,000 amount, the annual payment would be $2,333.33 ($35,000/15). You could pay it as one lump sum or in monthly installments of $194.44 ($2,333.33/12).
The CRA will send you an HBP account statement with the total amount you owe and the minimum payment due. You can also see your HBP balance on your Notice of Assessment and your CRA My Account.
How to Repay the RRSP Home Buyers’ Plan
You’ll need to report your HBP repayments on your income tax return:
- Fill out Schedule 7 to report your RRSP contributions or unused amounts from previous years.
- Enter the amount you wish to transfer to the HBP repayment on Line 24600.
- Make sure to designate the amount to the HBP in Schedule 7, otherwise, your RRSP contributions will not count as a repayment; the HBP amount will be added back as taxable income.
TIP: You can contribute extra every year to reduce future payment amounts.
For example: If you withdraw the full $35,000 and paid $4,000 in the first year, the next 14 payments will be reduced to: ($35,000 – $4,000) / 14 = $2,214.29.
What happens if I don’t pay back my RRSP?
If you do not make the full annual repayment to your RRSP, or if you pay nothing at all, the government will treat the amount as income for that year and tax you on it which, defeats the purpose of the Home Buyers’ Plan.
You can’t use the contributions you made to a spousal RRSP account to pay for the HBP. This amount is considered the spouse’s fund. Similarly, you cannot use contributions made by your spouse to your spousal RRSP account. The only eligible contributions are the ones you made to your own RRSP account.
Cobbling together enough cash for a down payment on your first home, especially when the housing market is on fire, can be an uphill battle. If you’ve been diligent about contributing to your RRSP, the The Home Buyers’ Plan (HBP) is a great way to unlock potential savings.