If you’re a first-time buyer or haven’t owned a property within the last four years, the HBP lets you withdraw up to $35,000 from your RRSP to help purchase a home. You won’t be taxed on the money you withdraw (provided that you pay it back on time), and if you’re buying a home with your partner you could withdraw up to $70,000.
By using the HBP, you might be able to make a bigger down payment than would have been possible using your savings alone. Increasing your down payment reduces your mortgage (and therefore your payments) and could also take you over the threshold for mortgage loan insurance.
As a general rule, the down payment must be between 5% and 20% of the price of the home you’re buying. For a house priced at $400,000, a down payment of 20% would be $80,000.
Mortgage loan insurance is mandatory if your down payment is less than 20%. Though you’ll have to pay the premiums, you’ll be able to get your foot on the property ladder.
Be aware that the minimum down payment varies depending on the price of the property. For homes over $500,000, it’s 10% of the portion of the purchase price that exceeds $500,000. For homes over $1,000,000, the minimum down payment is 20% of the total price.
Here’s an example. For a home priced at $600,000, the portion in excess of $500,000 is $100,000, so you’ll need a minimum down payment of $35,000 (5% of $500,000 plus 10% of $100,000).
Tapping into your RRSP can be a good way to increase your down payment. The HBP can also help defray other costs involved in buying a home, like the land transfer tax.
Here are some rules for the HBP:
You don’t have to withdraw all the money at once. You can make multiple withdrawals under the program during the same calendar year.
Good to know: If you’re entitled to the disability amount on your tax return, you (and any related persons helping you with the purchase) are exempt from the first-time buyer requirement.
Don’t worry—it's not complicated. Here’s the strategy, step by step.
Even with a modest balance in your RRSP, you can still take advantage of the HBP by opting for an RRSP loan.
Here’s how it works:
It’s important to plan ahead if you want to use this strategy.
Your loan application may not be approved immediately, and you may need an accepted offer to purchase to get the loan. Tax refunds can take weeks or even months to arrive. This means that RRSP contributions should be made in December or January.
Remember that this is still a loan that you'll have to pay back, with interest. In a perfect world, you'd already have enough money to buy your property.
You might want to check out these savings strategies. Think about your beautiful new kitchen and resist that urge to get takeout!
In short, the HBP can help boost your down payment, which means your mortgage payments will be less.
Here’s a classic example of how to use the HBP. Beatrice wants to buy a condo for $350,000. She’s managed to put aside $35,000 for her down payment using systematic savings. However, she'd prefer to make a 20% down payment ($70,000) to avoid paying mortgage loan insurance.
Thanks to the HBP, Beatrice can withdraw the remaining $35,000 from her RRSP. She’ll then have up to 15 years to pay it back, repaying at least 1/15th of the amount withdrawn each year. For a $35,000 withdrawal, that works out to about $2,333 per year. The first repayment will be due no later than December 31 of the second year after the withdrawal. Here’s an important point to remember: the last day that you can contribute to your RRSP is December 31 of the year you turn 71, so anyone over the age of 56 who wants to take advantage of the HBP should make sure that they have fully repaid the money they withdrew before that deadline. If not, they will be taxed on the remaining balance.
Let’s imagine that Beatrice wants to buy the condo with Fred, who is also eligible for the HBP. They could both tap into their RRSPs and withdraw up to $70,000 to make the 20% down payment. However, they have to be common-law partners, married or have a child together.
If they split up, Beatrice could use the HBP again to buy Fred’s share and keep the condo as her principal residence, provided that she meets certain conditions set by the Canada Revenue Agency.
Remember that HBP repayments don’t affect your contribution room and can’t be deducted from your taxable income on your tax return. If you don’t manage to pay back the minimum amount required in a given year, you'll be taxed on it.
All in all, tapping into your RRSP with the HBP can be a great way to achieve your dream of becoming a homeowner. Just make sure that it’s right for you, that you understand how it works and know the rules to follow. If you have any questions, we’re here to help.
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