For many prospective first time home buyers, the dream of owning a home seems an infinite distance away because of one primary roadblock. That roadblock is your down payment.
The purchase of a home, even with the minimum 5% down, requires a significant amount of upfront capital. Many Canadians simply don't have access to this amount of money in a traditional savings account, primarily being a result of a rapidly rising real estate market that is pushing prices higher and higher.
So, are you forced to continue renting, endlessly scrolling the Canadian real estate apps while paying your landlord more money in rent than your mortgage would be? Fortunately, if you have a Registered Retirement Savings Plan (RRSP), you might just be sitting on a down payment goldmine without even knowing it.
What is the RRSP Home Buyers Plan (HBP)?
In February of 1992, the Home Buyers Plan was introduced and since then Canadians have gained access to more than $6.2B to finance the purchase or construction of their first home.
The gist of the home buyers plan is quite simple. You are allowed to withdraw a particular amount of money from your RRSP to fund the purchase of your principal residence. In return, the government simply asks that you repay the capital over the duration of 15 years, either making minimum payments every year over the entirety of the 15 year period or paying the full amount off as quickly as possible.
The Home Buyers Plan seems simple enough. And it is true, we could just end the article here and you'd know the generic idea of the plan.
However, there are plenty of stipulations the Canada Revenue Agency places on the Home Buyers Plan, and if you're not careful, you could end up either owing money or even worse withdrawing unqualified money.
With that being said, we're going to be answering all the questions you need to know about the plan in this article.
What do I need to use the Home Buyers Plan?
The simple answer to this question is that in order to utilize the Home Buyers Plan, you need an RRSP with capital currently inside of it. However, you can't simply use any available capital inside of your RRSP. Not only are there financial limits, time limits, but certain conditions as well.
Eligibility criteria for the Home Buyers Plan
In order to qualify for the Home Buyers Plan, there are some criteria you do need to meet.
First off, this must be your first home purchase, at least in the last four years that is. If you haven't owned a home for four years and do not owe any balance on your previous plan (which we'll get to in a bit) you could be eligible for the plan again.
Secondly, you need to be at minimum a resident of Canada, and the home must be your primary residence.
How much can I withdraw from my RRSP to buy a house?
As of 2022, the maximum allowed money to be used for the Home Buyers Plan from your RRSP is $35,000. This hasn't always been the case, however, as it was increased from $25,000 in 2019, likely to accompany the rising cost of real estate in Canada.
If you're looking to buy a house with your significant other, it gets even better, as both of you can utilize the Home Buyers plan to make your purchase. This means on a $500,000 home, you could potentially have a 14% down payment from your RRSPs alone!
Can I simply max out my contribution room and pull it out for a down payment?
This is a question a lot of first-time homebuyers ask. And unfortunately, the CRA has closed off this juicy looking loophole.
In order to utilize the RRSP Home Buyers Plan, the money must have been deposited into the account a minimum of 90 days from the time of the withdrawal. This means that money you deposit 30 days ago would not be eligible for the Home Buyers Plan.
How long do I have to repay the RRSP Home Buyers Plan?
You have a total of 15 calendar years to repay the money you withdrew out of your RRSP. However, it gets a bit confusing as your first annual repayment does not start until the second year after you purchase your home.
So for example, if you purchase a home in 2022 and withdraw funds, your 15-year repayment period starts in 2024, and you have until 2039 to repay the capital.
You will be assigned a minimum payment every year, which is typically sent with your notice of assessment every year. This is the absolute minimum you have to pay on a year to year basis, and if you do end up making larger payments this minimum payment will be reduced moving forward.
There is nothing saying you cannot repay the full outstanding HBP balance in any year you choose. The important part is that you are making the minimum payments required.
Awesome, you want to utilize the Home Buyers Plan. But how do you start?
Getting started with the plan is relatively easy. All you really need to do is fill out this form (Form T1036) and give it to your RRSP issuer. It's important to remember that this form must be submitted for each RRSP you plan to withdraw from.
If you have a total of $35,000 with 3 different financial institutions, you'll have to fill out a form for each if you'd like to withdraw all of the money.
Do I get a tax deduction for repayments to the Home Buyers Plan?
Unfortunately, no. Every year, at least until the balance is paid off you will have to designate a portion of your RRSP contributions towards the repayment until it is fully paid off. Again, this could be the annual minimum amount, or it could be more.
Whatever it may be, this designated amount is factored into your total tax return and does not count as a tax deduction.
Do repayments to my RRSP impact my contribution room?
Because you are not getting a tax deduction on your repayments, these contributions also don't impact your RRSP contribution room moving forward.
Considering these are RRSP deposits you have made in the past and are now using to purchase a home, you have already used previous RRSP contribution room to make them. So, it makes complete sense that they can be deposited back into the account without impacting forward room.
What if I ultimately decide to not buy a home?
If you went through the process of utilizing the Home Buyers Plan but didn't quite find the home you wanted and are not sitting with a large cash balance, don't fret. The government does allow you to cancel and put the money back into your RRSP if some special rules are met.
If you or the related person with a disability were unable to buy or build a home by October 1st of the year following the date of withdrawal, or you became a non-resident of Canada, you are eligible to cancel the plan.
Simply fill out a RC471 form and provide details to the government as to why you have decided to note participate in the Home Buyers Plan. There will be a repayment deadline attached to the funds, however, and any money not put back into the account will be taxed as RRSP income.
So optimally, if you have decided not to participate in RRSP Home Buyers Plan, get the money back inside your RRSP as soon as possible.
What are the advantages of the RRSP Home Buyers Plan?
- Access to capital to accelerate the timeline for the purchase of a home, condominium, apartment, mobile home, or townhouse
- The ability for a common-law partnership to double the amount available ($35,000 x 2) for a down payment
- The ability to grow your RRSP savings, and thus your amount of down payment, with company RRSP matching plans
- A very long repayment window reduces the stress for first-time buyers
What are the disadvantages of the RRSP Home Buyers Plan?
- RRSPs may not make financial sense for some Canadians, rendering the plan inefficient
- In today's environment of rapidly increasing home prices, $35,000 will barely be a down payment in some markets
- Repayments are not a tax-deductible contribution
- If you do not make the minimum required payment, it must be claimed as RRSP income on your tax return
Overall, the Home Buyers Plan is a great option for Canadians to gain access to down payment capital
The Home Buyers Plan is something I used back in 2011 to get into my own home at the age of 21. I was able to accelerate the deposits into my RRSP with an employee matching program that allowed not only myself to contribute to my future down payment, but my current employer as well.
However, there is some caveats. It has its restrictions, and for some Canadians from a tax perspective contributing to the RRSP just doesn't make much sense.
Ultimately, a person has a sit down, jot down the pros and cons and figure out if the RRSP Home Buyers Plan is the right plan for them to accelerate the timeline and get into their first home.