How Does the Home Buyers’ Plan Work?

Why use the HBP?

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.

Is the HBP right for you?

Here are some rules for the HBP:

• You can only use your own RRSPs for an HBP withdrawal.
• The maximum withdrawal is $35,000 per eligible person.
• The house you're buying or building must be in Canada.
• You must be a first-time home buyer (or not have been a homeowner within the previous four years).
• You must be a resident of Canada.
• The property must become your principal residence before October 1 of the year following the RRSP withdrawal.  (Be careful if your property is under construction, because delays might prevent you from meeting the deadline.)
• The money you withdraw under the HBP must have been contributed to your RRSP at least 90 days before withdrawal.
• You can’t use the HBP for a second home, like a cottage. But the property you’re buying doesn’t need to be a single-family home. You can also take advantage of the HBP to buy a unit in a triplex or a high-rise.
• You have to repay the money you withdraw within 15 years. (The 15-year period begins in the second calendar year after the withdrawal.)

You don’t have to withdraw all the money at once. You can make multiple withdrawals under the program during the same calendar year.

How does the HBP work?

Don’t worry—it's not complicated. Here’s the strategy, step by step.

• Make sure the money you want to withdraw is in your RRSP for at least 90 days before the withdrawal date.
• Fill out Canada Revenue Agency form T1036 Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP, which takes you through the eligibility criteria.
• After 90 days, make an HBP withdrawal and use it for your down payment. 
• You then have up to 15 years to pay back the amount withdrawn from your RRSP. Repayments start in the second calendar year after the withdrawal. So if you used the HBP in 2020, for example, you would have to start paying it back in 2022.
• You must repay at least 1/15th of the withdrawal each year. This means that if you withdraw the maximum amount of $35,000, you’ll have to pay back $2,333.33 to your RRSP each year. 
• If you’re a sensible saver who puts $5,000 a year into your RRSPs, you might decide to put some (or all) of this toward the repayment. Be aware, though, that contributions you designate as repayments can’t be used to reduce your taxes. (The HBP is good, but it's not that good.)

Can you use the HBP without much in your RRSP?

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:

• The Bank gives you a loan that doesn’t exceed your RRSP contribution room, up to a maximum of $35,000, the limit for the HBP. 
• You deposit this money in an RRSP account for 90 days. You’ll have to pay interest on the loan.
• The Bank will send you a tax receipt confirming your RRSP contribution.
• You can include this RRSP deduction in your next tax return to benefit from a tax refund, which you can then use to increase your initial down payment. 

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. 

Case study: Beatrice

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.

What are the differences between an FHSA and an HBP?

What are the differences between the Tax-Free First Home Savings Account (FHSA) and an HBP? And which one should you choose? It depends on your savings goals, as well as your financial and tax situation.

FHSA:

• No repayment required
• No withdrawal limit
• Maximum annual contributions of $8,000 and a lifetime total of $40,000
• No minimum holding period required for contributions to be deductible and eligible for withdrawal
• The deadline for contributions to a FHSA is December 31 of each year

HBP:

• Repayment required
• Withdrawal limit of $35,000
• Maximum annual contributions of the RRSP, which is 18% of your previous year’s income or the current fixed contribution limit
• The money must be deposited into your RRSP 90 days before you withdraw it under the HBP
• Deadline for RRSP contributions: 60 days after the end of the year

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.