The Home Buyers Plan allows you to withdraw up to $25,000 from your RRSP early to use as a down payment. In this post, 20/20 Mortgage Life Insurance gives you the ins and outs, as well as the pros and cons, of this program.
20/20 Mortgage Life Insurance is committed to affordable, accessible insurance. We want you to feel safe trusting your future to us, and we want you to have a bright future. We care about you and your finances, and are happy to share information that you may find useful, like the Home Buyers Plan (HBP).
What Is The Home Buyers Plan?
Are you a first-time home buyer? Do you have an RRSP? If so, you may be eligible to make an early withdrawal from your Registered Retirement Savings Plan to use toward your down payment as part of Canada’s Home Buyers Plan.
The Home Buyers Plan is a Canadian program that allows eligible participants to withdraw up to $25,000 from their Registered Retirement Savings Plan (RRSP) to use toward a down payment on a house. The money is considered a loan, and you have 15 years to pay it back into your RRSP by designating your contributions as repayment.
Am I Eligible For The Home Buyers Plan?
First-Time Home Buyer
Asking if you’re a first-time home buyer is a bit misleading. For the purposes of the HBP, it is possible to have owned a home previously and still qualify. The program uses a four-year period rule. You must not have lived in a home that you (or your spouse or common-law partner, if applicable) own for the four years prior to the withdrawal of your RRSP funds for the purpose of making a down payment. They calculate the four years based on the end of the month prior to your withdrawal, starting on January 1 of the fourth prior year. This means if you withdraw from your RRSP in September 2018, you can’t have lived in a home you own from January 1, 2014 through August 31, 2018.
Additionally, if you have owned a home but your spouse or common-law partner is considered a first-time home buyer, you could still be eligible.
Other Considerations
You must plan to live in the house being purchased (or built) as your primary residence, unless you are using your participation in the HBP to help purchase housing for a disabled relative, who must then plan to live in the house as their primary residence.
The house must be purchased or built by October 1st of the year following your withdrawal. So if you withdraw from your RRSP in May 2017, you must occupy the home by October 2018 or the withdrawal will not be eligible for the HBP. You must also have a written agreement to purchase the house for yourself (or a disabled family member).
Lastly, even if you meet all other criteria, if you have already withdrawn the maximum $25,000 from your RRSP already you cannot participate in the HBP. If you withdraw from your RRSP and do not qualify for the Home Buyers Plan the money is considered income and will be taxed. Before making a withdrawal speak to a financial advisor who can confirm your eligibility.
What Are The Rules?
You cannot own the home more than thirty days before your withdrawal, and you cannot withdraw money that hasn’t been in the account for less than ninety days. So plan to make the last contribution you want to use at least three months before you’ll be closing on your house to give yourself time to make the withdrawal.
You must be considered a resident of Canada to participate. Note that a resident is not the same thing as a citizen or permanent resident. Additionally, you are responsible for ensuring your eligibility. As noted, if you withdraw and don’t qualify, you’ve just incurred a potentially hefty tax on that income.
Unsurprisingly, you must fill out a handy-dandy application, called Form T1036 or Home Buyers' Plan (HBP) Request to Withdraw Funds from an RRSP.
Is It Worth Doing?
It can be! The common complaints about the HBP are negligible if you’re aware of them and plan ahead.
The $25,000 Limit
Some people complain that the withdrawal maximum is limited to $25,000 when home prices in major metropolitan areas have risen so much. While it’s true that that amount is only 5% on a $500,000 single-family home, it is also 12.5% on a $200,000 condo. The program is designed with first-time home buyers in mind, and originally the thinking went that a first-time home buyer is young and doesn’t have a large family yet. This mode of thinking is considered outdated with even condo prices as high as they are in some places, but it still offers solutions to people who may not have other or as many options.
Repayment
As noted, the money withdrawn as part of the HBP is considered a loan and thus it needs to be repaid. The government gives you fifteen years, so you must contribute $1667 a year back into your RRSP, specifically designated as repayment, on top of whatever other RRSP contribution you make. If you don’t pay it back in full, or fail to designate the contributions as repayment, you will be considered in default and accrue penalties as you would with any other loan. If you plan your repayment into your budget and make sure to properly designate it, you shouldn’t have a problem (unforeseen circumstances notwithstanding, of course).
There are exceptions to the eligibility rules and special clauses for home buyers purchasing a home for a disabled relative, or those building a home or purchasing pre-build. The Government of Canada lays out more about the Home Buyers Plan on their website.
Contact Us Today
If you decide to purchase a home using the Home Buyers Plan to make a downpayment, you’ll want to protect your investment. Consider 20/20 Mortgage Life Insurance when you do. If you’d like more information about mortgage life insurance and how it can help your home buying process, explore our website or get in touch online. If you'd like to speak with an advisor, you can call us anytime at 1-844-974-2020.
