The Home Buyers’ Plan allows first-time homeowners to withdraw money from their Registered Retirement Savings Plan (RRSP) and put it towards their home purchase.
As an individual, you can withdraw up to $25,000 (or $50,000 for a couple) which can go a long way in helping you put down a bigger chunk of money as a down payment. A larger down payment could also help you avoid needing to take on additional and expensive CMHC insurance costs that kick in when your down payment is less than 20% of your home’s purchase price.
The Home Buyers’ Plan is one way to withdraw funds from your RRSP without paying tax.
Home Buyers’ Plan – What is It?
The Home Buyers’ Plan (HBP) was introduced in 1992. It allows you to withdraw up to $25,000 from your RRSP to finance the purchase of a home. If you and your spouse or partner are purchasing the home together, you can withdraw up to $50,000. To utilize the HBP, you must meet the following eligibility criteria:
- Be considered a first-time homeowner. This means you are either buying your first home ever; or, if you have owned a home previously, it has been 4 years or longer since you last owned or lived in it.
- You must be a resident of Canada.
- You must buy or build your home before October 1st of the year following your HBP withdrawal.
- Your home cannot have been owned for more than 30 days prior to you withdrawing funds from the HBP.
- Funds contributed to your RRSP in the last 3 months cannot be withdrawn under the HBP.
Home Buyers’ Plan – How Does It Work?
After withdrawing the funds from your RRSP and using it to finance anything related to your home purchase, you are required to pay the money back to your RRSP within 15 years. The total amount you withdraw is divided into 15 equal installments and must be paid annually.
For Example: If you withdrew $18,000, you will be required to make a minimum of $1,200 per year in HBP repayments to your RRSP for 15 years.
HBP repayments must be designated as such using Schedule 7 when filing your income and benefit return every year. If not, all your RRSP contributions will be counted as regular contributions.
What happens if you do not pay the annual amount? You get hit with penalties! Any outstanding balance for the year is added to your annual income and taxed accordingly. No tax or interest is levied on your withdrawal or repayments as long as you follow the rules. To know what your required annual repayment is, check your CRA MyAccount.
Pros of the Home Buyers’ Plan
1. Become An Homeowner Quicker: For some people, the funds you can withdraw from your RRSP through the HBP program can make the difference between becoming an homeowner now, or having to wait a few more years to save a down payment.
2. Save On Insurance: Even if you already have the minimum 5% down payment to purchase a home, an HBP can save you lots of money. In Canada, you are required to obtain a mortgage default insurance aka CMHC Insurance when your down payment is less than 20% of your home’s purchase price. On a $400,000 home, the mortgage default insurance is an additional $15,200 out of your pocket.
Cons of the Home Buyers’ Plan
Raiding Your Retirement Pot: The main purpose for creating the RRSP was to help Canadians save for retirement. Borrowing funds from your RRSP to pay for a house may/may not enhance your retirement prospects in the short-term based on a couple factors, including how real estate performs. However, this should not significantly hamper your retirement prospects in the long run if you plan to quickly contribute the money back.
Other Ways To Save For Your Down Payment
- Good Old Savings: Start putting money aside in a savings account until you get to your desired goal.
- TFSA: Use your Tax-Free Savings Account to save money as well as keep all the income earned in the account. More about saving in your TFSA here.
- Gifts and Other Windfalls: Monetary gifts from family and friends, workplace bonuses, tax refunds, etc. can be put aside to build up your down payment.
- Understanding The First-Time Home Buyers Tax Credit
- Closing Costs To Prepare For When Buying a Home
- How To Transfer Your RRSP, TFSA, RESP, and RRIF Between Banks
- RRSP Deduction Limit, Carry Forward and Over-Contribution Rules
- When You Should Choose a TFSA Over the RRSP
- How To Generate Income From an RRSP When You Retire