What is the Home Buyers' Plan?
The Home Buyers Plan (HBP) is an incredibly popular Canadian government program introduced in 1992. It has helped countless first-time home buyers get on the property ladder.
As home prices across the country continue to increase, the Home Buyers' Plan should continue to grow in popularity by helping first-time buyers place larger down deposits on new homes.
But what is the Home Buyers' Plan (HBP)? This article provides a rundown on the Home Buyers' Plan in Canada and how to borrow from your RRSP for a mortgage
How does a Home Buyers’ Plan work?
The Home Buyers Plan (HPB) in Canada is a program that allows first-time homebuyers to withdraw money from their registered retirement savings plans (RRSPs) to buy or build their first home. The purpose of the HBP is to make buying or building your first home a little more affordable since it can increase the size of your down payment and reduce overall mortgage payments.
You may withdraw up to $35,000 tax-free from your registered retirement savings plans (RRSPs) under a Home Buyers' Plan. Couples may borrow up to $70,000 total, as long as both individuals are eligible.
Our experts can help you to open an RRSP or tap into an existing one to fund your housing project.
Who qualifies for Home Buyers’ Plan?
To qualify for the Home Buyers' Plan and be eligible for the tax-free RRSP deduction, candidates must meet several HBP criteria. Conditions that must be met in order to tap into their RRSP with an HBP include:
- Being a Canadian resident (at the time of RRSP withdrawal)
- Being a first-time home buyer
- Moving into the residence no later than one year after buying or building the property
- The property must be your principal residence
- Withdrawing no more than a combined $35,000 from your RRSPs, with all withdrawals coming within the same tax year
- RRSP contributions have to have been in your RRSP account for at least 90 days before being withdrawn under the HBP program
- Buying or building property in Canada
- Buying or building a home for a relative with a disability
You are responsible for ensuring that you are eligible for the Home Buyers' Plan. If you withdraw money from your RRSP for the HBP and the full conditions are not met, the funds might not be considered eligible and could subsequently be taxed as income. Check with a financial advisor, a tax professional or your financial institution to be sure.
How do you withdraw from your RRSP for a Home Buyers’ Plan?
To withdraw money from your RRSP for the Home Buyers' Plan you have to complete the T1036 Home Buyers Plan withdrawal form which can be downloaded from the Government of Canada’s website or accessed below:
Here's how the RRSP withdrawal works:
- You need to complete Area 1 of the T1036 form.
- Submit the form to the financial institution that holds your RRSP. They will fill out Area 2 of the form.
- Your RRSP provider will deposit the requested funds into your bank account without a withholding tax.
- In addition to the requested funds, your RRSP provider will also provide you with a T4RSP statement which you will have to keep for your tax return the following year. The T4RSP shows how much money was withdrawn from your RRSP and for what purpose.
There are specific requirements that the withdrawal from your RRSP must meet for the funds to be eligible for the Home Buyers' Plan and considered tax-free. All the funds must follow the HBP withdrawal rules and be:
- Withdrawn within one tax year
- Withdrawn within 30 days of completing the building or taking ownership of your first property
- Used to buy or build the qualifying property before October 1st of the following calendar year from when the RRSP withdrawal was made
Pros and cons of the Home Buyers’ Plan
The Home Buyers' Plan is one of the two ways that money can be withdrawn from an RRSP early without paying tax on the funds, with the other being a Lifetime Learning Plan (LLP). Therefore, first-time home buyers often consider the option when looking to join the property ladder.
While your financial circumstances dictate whether or not you should withdraw money from your RRSP for the HBP, it is worth considering the pros and cons of the Home Buyers' Plan.
Home Buyers’ Plan advantages
- Gain access to funds that are usually earmarked for retirement without having to pay tax
- Having a larger down deposit on your first house will reduce interest paid on mortgages
- The HBP is essentially an interest-free loan
- It is a good way to diversify your RRSP investments into real estate
Home Buyers’ Plan disadvantages
- You must ensure that you are eligible for the HBP, or the withdrawn funds will be subject to tax
- The RRSP withdrawal has to be repaid within 15 years, or outstanding money will be treated as a normal RRSP withdrawal and taxed
- You are decreasing the amount of money that would grow tax-free within your RRSP
- Minimum yearly repayments are non-negotiable
If you still need help deciding on whether or not the Home Buyers' Plan is a good option for you, our experts can help you get started:
Start working with a financial advisor today
How to repay a Home Buyers’ Plan?
Any participants in Canada’s Home Buyers' Plan have to repay the money they withdraw from their RRSP back into their RRSP within 15 years. This is because the HBP withdrawal is considered a type of tax-free loan program created to help first-time home buyers and to differentiate the withdrawal from an ordinary RRSP deduction.
In addition to having to repay the RRSP Home Buyers' Plan withdrawal within 15 years, it is important to note that the first payment falls due two years after the initial withdrawal date. Subsequent payments are then to be made annually with a minimum of 1/15th of the total withdrawn capital being paid each year.
For example, if an individual withdraws an eligible $30,000 for the Home Buyers' Plan from their RRSP in 2021, their first annual repayment will be due in 2023, and the final year of payment will be 2037, both years inclusive. Each annual minimum payment would be $2,000, which is $30,000 divided by 15.
You can also choose to repay more than you owe each year or make additional payments through smaller lump sums. Each additional repayment will reduce your annual overall minimum repayments.
If the RRSP withdrawal is not paid within the timeframe and in accordance with the Home Buyers' Plan repayment rules, any outstanding money may be treated as a normal RRSP withdrawal and be subject to tax.
Home Buyers’ Plan alternatives
The Home Buyer Plan is a program to help first-time home buyers buy or build their first property. However, without an RRSP, you won’t be able to withdraw any capital from one to take advantage of the program.
If you have a TFSA, or tax-free savings account, it can be advantageous to borrow from it instead of from an RRSP. It is a more flexible account, with no obligation to repay it.
Another alternative to the HBP is the First Time Home Buyer Incentive, which is a shared-equity mortgage with the Canadian government where you borrow either 5% or 10% of the purchase price of your first eligible property. That percentage of the property's value is then repaid to the government within 25 years or when the property is sold. This helps home buyers reduce their monthly mortgage payments.