Buying a home in Canada is an expensive endeavour, mainly because you need, at minimum, a 5% down payment to qualify for a mortgage. With the average price for a home in Canada reaching $720,850 in November 2021, the idea of saving $36,042 to purchase a home may be daunting.
Fortunately, you aren’t on your own to save that money. You have options. First, you could ask your family for a gift. Gifting part of your down payment is a common strategy, with just under 30% of first-time homebuyers receiving help from family, according to a CIBC market analysis study last year. Alternatively, you could make use of one of the programs available from the federal government that helps first-time homebuyers get on the property ladder. One such program is the Home Buyers’ Plan (HBP).
What is the Home Buyers’ Plan?
The HBP is a government program that allows first-time homebuyers to borrow funds from their Registered Retirement Savings Plan (RRSP) for their first home.
The program works by allowing first-time homebuyers to withdraw up to $35,000 (or $70,000 if both spouses are first-time homebuyers) to use toward the down payment and closing costs of their first home purchase.
There is a small catch, however. Even though you are effectively borrowing money from yourself, you’ll need to pay it back. There is a two-year grace period, and then you’ll need to pay back the amount you borrowed at a rate of 1/15th of the balance over 15 years.
Say you purchase a home in 2022 using $35,000 from your RRSP to participate in the HBP. In 2024, you would need to start repaying the funds at a minimum rate of $2,333.33 annually. You can calculate this by dividing the amount you borrowed from your RRSP by 15 (the number of years allotted for repayment). You can, however, repay the funds faster if you choose to do so. This will reduce the HBP amount owing in later years.
Eligibility requirements for the Home Buyers’ Plan
To use the HBP, you’ll need money in an RRSP that was deposited at least 90 days before your intended date of withdrawal. To use the HBP, you’ll need to complete a form and submit it to the institution that holds your RRSP. The time to process the request takes several days or weeks, but eventually, the money will land in your account, where you can use it for your home down payment or closing costs.
There are some eligibility requirements that you must meet to use the HBP. Since this program is aimed at helping first-time homebuyers, one essential requirement is that you be a first-time homebuyer. You are considered a first-time homebuyer if:
- You haven’t, in the past four years, occupied a home that you or your spouse or common-law partner has owned
- You deposited money you plan to withdraw from your RRSP at least 90 days before your withdrawal date
- You are a Canadian citizen, and the age of the majority
How to pay back the Home Buyers’ Plan
Keep in mind that if you use the HBP to bolster your home’s down payment, you’ll need to start repaying the funds after the two-year grace period at a rate of at least 1/15th of the balance over the next 15 years.
To repay the HBP, you’ll need to designate a portion of your RRSP as repayment on your taxes. You can specify the contributions to any RRSP you hold, not just the one from which you withdrew the funds. If you’d like to pay back the HBP faster than the minimum rate of 15 years, you can designate a bigger portion of your RRSP contributions.
If you don’t pay back the HBP, the unpaid portions are added to your taxable income.
Pros and cons of the Home Buyers’ Plan
In Canada’s competitive housing market, it can be challenging to amass a down payment large enough to afford a home that meets your needs. Here’s what you should consider when deciding whether to use the HBP.
- Increases down payment by $35,000
- Tax-free money from your RRSP
- Long payback period
- Lowers monthly mortgage payments
- Increases your maximum purchase price
- Must be paid back over 15 years, or the money is taxed
- Draining your retirement savings could impede growth in your retirement accounts (less compound interest)
- Money must be in an RRSP for 90 days before the withdrawal
- You must be a first-time homebuyer to qualify
- Does not increase how much mortgage you can afford
How to know if the HBP is right for you
The HBP is a valuable tool to help you increase the size of your home down payment and purchase the home of your dreams sooner. Increasing your home down payment size will make homeownership more affordable by decreasing your mortgage payments, or it can help boost your purchasing power.
Best of all, since the HBP is a government-sanctioned program, you don’t have to pay tax on the money you withdraw if you repay the fund within 15 years at the specified rate. However, the HBP has some downsides, with the biggest being the tax consequences of not paying back the funds. If you don’t repay the money, it becomes taxable income, which will permanently deplete your retirement funds.
If you plan to pay back the HBP on time, it can be an excellent tool to help homeownership become a reality.