Home Buyers’ Plan Explained

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Do you want to know how the Home Buyers’ Plan works? Anyone in the market for the first home is likely worried about their down payment? The prices of Canadian homes are skyrocketing and while you only require a 5% down payment to buy, that 5% is still a pretty steep price for most people.

There are several solutions to this problem including using money from your Registered Retirement Savings Plan (RRSP). Now, I know you are probably thinking RRSPs are made for retirement and by taking it out early you will be heavily taxed. However, with the Home Buyers’ Plan, this is not the case. The Home Buyers’ Plan will allow you to borrow money from your RRSP, tax-free, to help buy your home.

Of course, there are requirements and contingencies in place. Plus, as appealing as this idea might be, it’s not for everyone. However, it is an option and in this article, I’m going to explain everything you need to know about the Home Buyer’s Plan.

What is the Home Buyers’ Plan?

So what is the Home Buyers’ Plan and how does it work?

The Home Buyers’ plan is a Canadian government program that is available for first time home buyers. Essentially, it allows these individuals to withdraw up to $35,000 tax-free from their RRSP to use as a down payment on a home. If you are a couple and both of you are buying a home for the first time, you can each access $35,000 which means you can have a combined total of $70,000 to use towards your down payment.

You will need to meet some requirements and fill out paperwork. Once approved, you will have to fill out a T1036 form which you will then submit to your financial institution to be able to withdraw the money from your RRSP.

The important thing to note here is that the Home Buyers’ Plan is a loan, not a grant. This means that the money you take out of your RRSP needs to be paid back into it within 15 years.

Who can apply for the Home Buyers’ Plan?

The Home Buyer’s Plan is not available to everyone. There are a few stipulations in place that you need to be mindful of if you want to apply. They are:

  • You must be a Canadian resident
  • You must be a first time homeowner (note: this means you cannot have owned a home within the previous 4 years. However, there are some exceptions for people with disabilities)
  • You must have a written agreement to purchase a specific home. The Home Buyers’ Plan will not work for a general mortgage pre-approval
  • The home you are planning to buy must be your main residence. Income properties are not eligible for the Home Buyers’ Plan
  • RRSP money that you plan to withdraw must have been in your account for a minimum of 90 days
  • It’s possible to apply for the Home Buyers’ Plan after purchasing a home as you have a 30-day window

One strategy that people who plan on using the HBP is to deposit their down payment into their RRSP so they can get a tax refund. If you go this route, don’t invest that money. Keep it in cash or in a qualifying high-interest savings account.

How to repay the Home Buyers’ Plan (& what happens if you don’t?)

As I mentioned earlier in this article, the money you withdraw from your RRSP for the Home Buyer’s Plan does need to be repaid in total within 15 years. Payments will occur yearly starting the second year after the withdraw has been completed. This means you need to pay 1/15 of the total loan back each year.

You can choose to repay your loan back faster should you choose. Come tax time you just need to designate a larger portion of your RRSP contributions as loan repayment. Your repayments will be reflected on your Notice of Assessment for you to easily keep track of.

But, what happens if you don’t pay back the required 1/15 of the loan amount each year? Well, your money which was originally tax-free will then be considered RRSP income and taxed accordingly. In addition, you would have lost that contribution space so using the Home Buyer’s Plan could be an RRSP mistake.

While this isn’t the worst outcome in the world, it does defeat the purpose so it is in your best interest to make sure that you pay off your Home Buyer’s Plan loan as required.

Does the Home Buyers’ Plan affect RRSP contribution room?

This is a valid question since, under most circumstances, when you withdraw money from your RRSP early you lose the contribution room. However, with the Home Buyers’ Plan, this is not the case.  The Home Buyer’s Plan does not affect your contribution room unless you’ve failed to make a repayment.

Now, it’s important to note that money paid back after taking out a Home Buyers’ Plan loan cannot be used as a tax deduction. That would be double-dipping since, technically, you have already used that money towards a tax deduction. However, you can still divide your contributions so some are deemed a new contribution and can be used as a tax deduction, while a portion goes back to pay your Home Buyer’ Plan loan.

It’s up to you to remember to designate the money towards the loan, so don’t forget or you may be taxed since you didn’t repay your loan for the year.

Is the Home Buyers’ Plan a smart idea?

Is the Home Buyer’s Plan a smart idea? Well, it depends and there are both pros and cons to using it.

Pros of the Home Buyers’ Plan

  • Interest-free loan
  • 2-year grace period before you need to start paying back the loan
  • No maximum payback limit, you can pay it off as quickly as you like
  • The Home Buyers’ Plan does not affect RRSP contribution room

Cons of the Home Buyer’s Plan

  • It’s still considered a loan, even though it’s your own money
  • Must be paid back within 15 years
  • You lose the potential to earn compound interest on that RRSP money
  • You lose contribution space if you don’t repay the loan
  • Lots of requirements that mean you need to be very organized

What about the First-Time Home Buyer Incentive?

The First-Time Home Buyer Incentive (FTHBI) is another government program that could help first-time buyers since it provides you additional funds for your down payment. That said, the rules are a bit more restrictive compared to the HBP. Here’s the First-Time Home Buyer Incentive eligibility:

  • You must be a Canadian citizen, permanent resident or non-permanent resident authorized to work in Canada
  • You or your partner must be a first-time homebuyer
  • Your total annual income can’t exceed $120,000 (If you’re buying in Toronto, Vancouver or Victoria, your income can’t exceed $150,000)
  • The amount you’re borrowing is no more than 4 times your income (If you’re buying in Toronto, Vancouver or Victoria, it’s 4.5 times your income)
  • The property you’re buying must be in Canada
  • Your portion of the down payment is not borrowed

To be clear, you still need to come up with the minimum down payment of 5%. The FTHBI just gives you additional funds so you can have a larger down payment. This would lower your monthly payments, but you would give up some equity. How much you’ll get depends on what you’re buying, but breaks down as follows:

  • 5% or 10% for the purchase of a newly constructed home
  • 5% for the purchase of a resale home
  • 5% for the purchase of a new or resale mobile/manufactured home

The program itself has good intentions, but realistically speaking, not that many people will qualify for it, or won’t want to use it since they’d be giving up too much.

Final thoughts

The Home Buyers’ plan can be a great tool and asset for new homeowners who want to put a larger down payment on their home. That said, it’s important that you do have a plan in place to pay that money back, ideally as quickly as possible. You don’t want to be permanently withdrawing money from your retirement fund.

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About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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