Should You Consider Taking Advantage of the Home Buyers’ Plan (HBP)?

Are you actively contributing to a Registered Retirement Savings Plan (RRSP)? If so, the Home Buyers’ Plan (HBP) can help you increase your down payment amount and purchase the home you want. The HBP allows you to withdraw from your RRSP account so you can build or buy a home for yourself or someone with a disability that's related to you (by marriage, common-law, blood, etc.)

As of March 2019, the Canadian HBP withdrawal limit is $35,000. That can go a long way toward buying or building your home. That said, it’s important to fully understand how the HBP works before you decide if it’s right for you.

How Does The RRSP Home Buyer’s Plan Work?

To withdraw from your RRSP account for the Home Buyers’ Plan, you’ll have to inform the Canada Revenue Agency and apply through your financial institution. As mentioned, if you qualify, you can extract up to $35,000 tax-free to use as a down payment for the purchase or construction of a home. Here’s what you’ll have to do to get started:

• Contribute to an RRSP - You can only qualify for the HBP if you have enough money in an active RRSP account, for at least 90 days prior to withdrawal. While you normally cannot withdraw from this type of account (penalty-free) until you’re of retirement age, the CRA makes an exception for qualified homebuyers.

• Be a Canadian first-time homebuyer - Only permanent residents who are buying or building their primary residence (or doing so for a disabled person) can qualify. If you’ve already used the HBP for yourself and want to do the same for someone else, you must have a zero balance on your original account.

• Submit the right forms - You must also visit the CRA website, fill out Section 1 of Form T1036 and bring it to the financial institution that holds your RRSP account. They will then complete Section 2 and, if you qualify, will send you the form T4RSP, which confirms how much you have borrowed from the account.

• Buy the home and withdraw - Once you meet all the criteria, you must withdraw the appropriate funds within 30 days of purchasing the home’s title, using a loan from your financial institution. If you wait more than 30 days, you will no longer qualify for the HBP and any money you withdraw will be subject to tax.

Declaring Your HBP Withdrawal and Repaying Your Debt

Once you’ve purchased your home, you must declare your T4RSP form on your income tax return for the same year the withdrawal was made from your RRSP account. Afterward, your annual CRA Notice of Assessment will display the amount you have repaid, what you have left to pay, and how much your next payment will be.

You will then have 2 years before you must start paying back what you’ve borrowed. Typically, this is done in yearly installments to your RRSP through your financial institution, over a maximum period of 15 years. Each payment must be made within the same year it’s due or within the first 60 days of the following year.

Other Requirements to Qualify for the Home Buyers’ Plan

• You cannot have owned another home within the 4 calendar years prior to applying for the HBP
• You must first enter a written agreement to purchase or construct the home
• You have to start living in the home within 1-year of its purchase
• If you’re buying a home with common-law partner or spouse who isn’t a first-time homebuyer, you can’t have lived in their primary residence for more than 4 years

Benefits and Drawbacks of The Home Buyer’s Plan

Now that you know what the RRSP Home Buyer’s Plan is and how you can withdraw from it, here’s a list of some of the main pros and cons of the process:

Benefits

• The loan will be tax and interest-free
• Your taxable income will decrease when you claim your RRSP contributions
• Two first-time homebuyers can combine their plans for a total of $70,000
• A larger downpayment means you’ll need to borrow less
• You only have to start paying it back after 2 years (total of 17 years to repay)

Drawbacks

• You won’t gain any interest on your funds like you would if they were invested
• Contributions you pay back from your HBP won’t count toward your deductions
• Being a homeowner with other expenses can make it difficult to repay your debt
• You must declare any missed RRSP payments on your taxes (and pay for them)

Do I Still Need a Down Payment If I Take Advantage of the HBP?

These days, it’s nearly impossible to find a home that doesn’t require a down payment. In fact, if your home costs $500,000 or under, your mortgage provider will require a minimum down payment of 5% of the home’s asking price. If your home is between $500,000 and $1,000,000, you can expect to pay at least 15% down (5% on the first $500,000 and 10% on anything over that, up to $1,000,000).

So, if the money you withdraw from your RRSP Home Buyers’ Plan doesn’t sufficiently cover your minimum down payment, you may not qualify for a mortgage and the rest of the funds will have to come from your own pocket.

Can You Purchase a Second Home Using The Home Buyers’ Plan?

Fortunately, you can be eligible for the Home Buyers’ Plan a second time, as long as you haven’t owned a home within the past 4 years. So, if you want to sell your first home and live in an apartment to save money, you can reapply as a “new” homebuyer 4 years later.

As mentioned, whatever balance remains on your previous HBP account must also be fully repaid before you can qualify a second time. The same sort of rules apply if you’re buying a home for a disabled relative.

What If My Spouse Owned a House Less Than 4 Years Ago?

If you’re purchasing a home with a spouse who owned a house less than 4 years ago, but you did not live in that house with them, you are still eligible to use the HBP. Just keep in mind that only you will be able to withdraw $35,000 from your RRSP, not your spouse.

How to Decide if The Home Buyers’ Plan is Right For You

Although the RRSP Home Buyers’ Plan can be the perfect solution for first-time homebuyers, it can also be an expensive and lengthy debt to take on, particularly when you consider all the other costs that come with being a homeowner in Canada. In fact, there are cases where you should and shouldn’t take advantage of the HBP:

The Home Buyers’ Plan Could Be Right For You When…

• You’re a first-time homebuyer or haven’t owned a home in at least 4 years
• You and your spouse/partner can combine your HBP funds
• You’re trying to purchase a home for someone with a disability
• You have automatic RRSP contributions set up with your financial institution
• You still have enough money in your RRSP to keep your retirement on track
• You don’t have enough for a 20% down payment (which would help you avoid having to pay mortgage default insurance)

The Home Buyers’ Plan Could Be Wrong For You When…

• You have owned a home within the past 4 years
• You already have enough for a 20% down payment
• Your retirement would be greatly delayed due to your withdrawal
• You would be withdrawing all of your RRSP funds (no interest gained)
• Would not be able to afford your annual payments
• You have an unsteady income, bad credit, or a lot of existing debt

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