It’s no secret that housing is a hot commodity in Canada. The housing market was booming even before the pandemic took it to record levels. For many, this leap in prices has pushed pause on their plans to make the move into homeownership. The Home Buyers’ Plan (HBP) is one way the government is helping make homeownership accessible for more people.
How does the Home Buyers’ Plan work?
Taking part in the Home Buyers’ Plan, you can access up to $35,000 of your Registered Retirement Savings Plan (RRSP) contributions tax-free. Normally, there would be hefty penalties for taking money out of your RRSP early. With the Home Buyers’ Plan, penalties are waived.
Before you get your financial planner on the phone, there is a catch to consider. Any money withdrawn has to be used to buy or build a home and must be paid back within 15 years. That’s a decent chunk of change to come out of your pocket. Especially, when you add on that you’ll be facing new mortgage payments at the same time.
Even with a deadline, it’s hard to knock the idea of accessing money for a down payment that doesn’t incur interest or fees.
Home Buyers’ Plan Pros
- Tax-free – You won’t need to pay tax or declare your RRSP withdrawal as income if it’s taken out through the HBP.
- Both you and your spouse or common-law partner can take part in the HBP.
- You can repay the withdrawal as quickly as you like without any penalties.
Home Buyers’ Plan Cons
- Strict repayment deadlines. Any money taken out through the HBP will be considered taxable income if it’s not paid back on time.
- Retirement savings loss. You’ll miss out on any growth from the funds you took out of your RRSP.
- No bankruptcy protection. HBP payments are not forgiven if you go bankrupt. You will still have to pay back the money.
Who is eligible for an HBP?
Not just anyone can take part in the Home Buyers’ Plan. There are some criteria you need to meet in order to qualify.
- You and your spouse or common-law partner must be first-time home buyers. Don’t be discouraged if you’ve owned a home before. The government’s definition of a first-time homebuyer is someone that hasn’t owned a home in four years.
- A written agreement to build or buy a qualifying home in Canada needs to be in place.
- From the time the RRSP funds are withdrawn until the home is bought it’s required that you are a Canadian citizen.
- Live in the home as your principal residence within a year of buying.
- The home can’t be in your possession more than 30 days before you take out the funds.
- Enough active RRSP funds need to be in place 90 days before the withdrawal.
What’s nice is that the HBP isn’t necessarily a one-shot deal. You can participate in the program again. As long as you still meet all the initial criteria and repaid all the funds by January 1st of the year you want to buy another home.
Applying for the Home Buyers’ Plan
Applying to take part in the Home Buyers’ Plan is easy! It’s just a matter of filling out the first section of the HBP Request to Withdraw Funds from an RRSP form. Once it’s complete, you bring it to the financial institution holding your RRSP. They’ll go through it to make sure you meet the HBP criteria. With that done, you’ll get a confirmation of how much you’ve withdrawn.
If you have multiple RRSPs you can take funds out of each. The only caveat to that is group and locked-in RRSP, those don’t qualify.
How to repay the Home Buyers’ Plan amount
Repaying your Home Buyers’ plan withdrawal is as simple as paying into your RRSP. At tax time, you would claim a fifteenth of your RRSP contributions as repayment. You can adjust to allocate more of your contributions to repayment if you wish, but no less. This will continue for the next 15 years, or until all the funds are fully repaid.
Any year you don’t make an RRSP contribution, you will need to declare one-fifteenth of the amount you withdrew as income on your taxes that year. For any year you don’t contribute enough to repay a fifteenth of your withdrawal, the portion not covered will need to be declared as income.
Can you cancel participation in the Home Buyers’ Plan?
Cancelling your participation in the Home Buyers’ Plan isn’t allowed except under a few circumstances.
The funds acquired through the Home Buyers’ Plan are earmarked for buying or building a home. A year from accessing the funds, if you haven’t bought or built a home you can withdraw from the program. At that point, you will be required to put the money back into your RRSP.
This program is set up for residents of Canada. If you happen to become a non-resident before building or buying a home with the HBP funds, you are eligible to cancel.
In both cases, all the funds need to be repaid. Any portion not repaid will have to be declared as income when you do your taxes the following year.
The Home Buyers’ Plan is a great option for those wanting to buy a home. Before participating in the plan, it’s a good idea to take a few things into consideration. Will you be able to pay back the money in time? Are you okay with losing out on the RRSP growth? Are you really ready for homeownership? After answering all those questions you’ll have a better idea if the Home Buyers’ Plan is right for you.
If you do take part in the Home Buyers’ Plan and find yourself in over your head, Debt.ca is here to help. We can set you up with a manageable plan to free yourself from debt. To get started, visit our website to get your free online savings estimate.