While housing is competetive, first-time homebuyers in Canada have plenty of investment options to let them compete - one of which being the Home Buyers' Plan (HBP). The HBP allows home buyers to withdraw funds from their RRSP to buy or build a qualifying home.
How does it do this? First, you must know about the RRSP.
The Registered Retirement Savings Plan (RRSP) is one of the significant tax-savings advantages afforded to Canadians. It allows investors to receive an income-tax deduction for contributions made to an RRSP.
It also allows taxpayers to accumulate unused contribution space over time when they are unable to use the entire amount that year. This allows taking advantage of peak earning years in the future.
While this has helped many Canadians save for their retirements it has largely put the money beyond the hands of the contributor for anything but retirement income savings. Any withdrawals from the RRSP are taxed heavily. Plus you will lose that contribution space within your Plan.
But the HBP allows Canadians a way to use those savings.
The HBP can be used in conjunction with the new First Home Savings Plan. When buying a home jointly with another person, a purchaser can combine maximum FHSA and HBP withdrawals ($80,000 from your FHSAs and $70,000 through the HBP) for a total of $150,000. That’s equal to a 20 percent down payment on a home priced at $750,000.
How does the Home Buyers' Plan work?
To be considered an eligible home buyer for the HBP you must meet certain conditions. The eligibility conditions are:
- You must be considered a first-time home buyer. You are considered a first-time home buyer as an individual if, in the four year period before applying, you did not occupy a home that you owned, or one that your current spouse or common-law partner owned.
- You must have a written agreement to buy or build a qualifying home for yourself.
- Or you must have a written agreement to buy or build a qualifying home for a related person with a disability, or to help a related person with a disability buy or build a qualifying home.
- The new home must be in Canada.
- It must be purchased or completed by October 1 of the year after the year the money was withdrawn.
The home you are trying to qualify for includes existing homes and those being constructed. Single-family homes, semi-detached homes, townhouses, mobile homes, condominium units, and apartments in duplexes, triplexes, fourplexes, or apartment buildings all qualify. A share in a co-operative housing corporation that entitles you to possess, and gives you an equity interest in a housing unit located in Canada, also qualifies.
How much can I withdraw from my RRSP?
The current maximum withdrawal is $35,000 per person. Couples who each have RRSPs may be able to access up to $70,000 toward the purchase price. This money must be repaid to the RRSP within a repayment period of 15 years or it will be included in the borrower’s taxable income, made as an annual repayment on your taxes.
Your HBP participation period starts on January 1 of the year you make an eligible withdrawal from your RRSP and ends in the year your HBP balance is zero.
How can I invest in my Home Buyers’ Plan?
If you have not already done so, invest in an RRSP. Your investments can be managed in your Questrade Portfolio and using the Passive software. When you have accumulated sufficient savings in the RRSP you can withdraw the funds tax-free for the property. You’ll need to fill in CRA formT1036, the “Home Buyers’ Plan (HBP) Request to Withdraw Funds from a RRSP”.
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It’s very possible to make multiple withdrawals under the Home Buyers Plan in the same year, provided you don’t exceed the $35,000 withdrawal limit. Your HBP can also be used in combination with Questrade Mortgage, an online mortgage service designed for those looking to buy a home or renew their mortgage. To register simply log in to your Questrade account. Then follow the links to mortgage information.
With your RRSP, you can invest in many investment vehicles such as:
- Government and corporate bonds
- Guaranteed investment certificates (GICs)
- Mutual funds
- And more
The key is to ensure you are investing with the goals of a home purchase in mind, which tends to be a short to medium term goal for most individuals. Therefore, making consistent contributions is one of the simplest ways to make your RRSP work in this term - and thus maximize how much you can withdraw for your HBP.
Repaying RRSP funds used for the HBP
The HBP repayment rules allows you to pay back the withdrawn funds interest-free within a 15-year repayment period. You can withdraw funds from more than one RRSP as long as you are the owner of each RRSP account.
Your RRSP issuer will not withhold tax on withdrawn amounts of $35,000 or less. Some RRSPs, such as locked-in or group RRSPs, do not allow you to withdraw funds from them.
There is no set minimum or mandatory repayment for you HBP repayment. Your annual repayment amounts are up to you.
However, a good rule of thumb is to take the amount your withdrew and divide it by the 15-year repayment period. For example, if you took out the maximum $35,000 withdrawal, you would seek to pay back $2,333 every year.
You should also note that money designated for an HBP repayment reduces your RSP credit, so homebuyers should take that into consideration when making future RRSP contributions. Also important to note is that HBP Repayments do not affect your RRSP deduction limit.
Your HBP repayment period starts the year after the year you withdrew funds from your RRSP for the HBP. For example, the time of repayment if you withdrew funds in 2023, would be designated on your tax and benefit return in 2025.
Can I Qualify Twice For First-Time Home Owners Status?
If you’ve already participated in the Home Buyers Plan in the past, you need to have a zero balance on your Home Buyers Plan account before participating for the second time.
Under certain circumstances, it is possible to qualify as a first-time home buyer again. These include:
- People who have separated from their spouse or partner
- People who are no longer living with, their spouse or partner
- People who purchased their first home a long time ago and would like to make use of federal government programs a second time
Home Buyers' Plan Alternatives
It’s important to remember that, although it is a loan from yourself, there are conditions in terms of repayment. For this reason, sometimes it’s better to use other alternatives such as money saved in a Tax Free Savings Account or other savings vehicle first since there are no annual repayment terms on that money.
As well, while real estate has seemingly made homes into cash boxes the past generation there is always the prospect of a downturn in the housing market in your area. In extreme circumstances— such as the 2008 derivatives crisis— a home’s value may be less than there indebtedness on the home. So investors should use prudence when using the HBP program.
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