You’ve heard of the Home Buyers’ Plan, right? That thing that helps you buy a home by letting you use your RRSP as part of your down payment? Sure you have. But do you actually know how to use it? And if you did, did you know the plan changed when the Liberal government took over last year?
Let’s say you’ve looked at whether renting or owning is best for you, you’ve calculated the up front costs, you’ve figured out the continuing costs as part of an ongoing budget, and you’ve decided you want to join the world of home ownership. Yay you!
That’s a huge decision and you probably put a lot of thought into it. So now that you’ve decided to become a home owner, how do you actually get there?
One of the ways is by taking advantage of the Home Buyers’ Plan, which is available to first time home buyers in Canada.
This assumes that you’ve been a diligent contributor to your RRSP at some point over the years and if so, that you would benefit from being able to use that money as part of your down payment.
Now typically, you’d be taxed on anything you withdraw from an RRSP. In this case though, no taxes are withheld when you withdraw your money and it doesn’t have to be reported as income, so long as you qualify and you follow the process to withdraw your funds under this plan.
Here’s the deal:
- You can withdraw up to $25,000 from your RRSP in a calendar year
- IF you are a first time home buyer** and
- IF you have a written agreement to buy or build a home (like a purchase contract with a realtor or builder)
- OR if you’re helping a disabled relative buy a home, in which case they’re the ones who have to have the written agreement.
- You have to plan to live in the home as your primary residence within 1 year of buying/building and
- The home has to actually be bought or built by October of the year after the year of withdrawal (as in… you withdraw the funds from your RRSP in Jan. 2016, so you have to buy or build a home by Oct. 2017).
- You can cancel it if you don’t actually end up buying/building a home.
- NEW: Now, under the Liberal government, you can also qualify if you’re buying a home to relocate for work, to care for an elderly relative, or if your spouse passes away or you get divorced.
How to get it?
It is surprisingly easy to take part in the Home Buyers’ Plan, considering it involves both the government and banks.
All you do is fill out the first part (A,B and C) of this form and bring it to whichever institution or organization that holds your RRSP. They’ll fill out the second part, and that’s it!
At most institutions, you give them direction as to how you want the funds – for example, I had mine transferred to a chequing account with the same institution. It usually takes a couple of days, but then the money is freed up from the RRSP and you’re good to go!
And the catch?
You have to pay it back. Womp womp.
You’re basically loaning yourself the money, interest free, but you do have to pay back the entire amount that you withdrew. This means if you withdrew $15,000, you have to contribute $15,000 back into the RRSP.
You may get returns that push you over $15,000, but repayment is based on the actual contribution amount.
You do get a grace period of the rest of the year in which you withdrew, plus another full year.
Basically, repayment starts the second year after the year you withdrew. So if you withdrew in January 2015, your grace period is the rest of 2015 and all of 2016, and you start repaying in 2017.
The repayments don’t count toward your RRSP room, and you can’t claim the repayment as a deduction on your taxes.
You have 15 years to repay the amount you withdrew, but there are minimum required payments. For example, if you withdraw $15,000 in 2015, and you start paying back in 2017, you owe a minimum of $1,000 back that first year. You can pay more, of course.
But be warned, if you pay less, not only do you have to report the difference as income, but you also lose that RRSP contribution room.
You can find out how much you owe by going to your CRA account online here.
But wait… do I only get one shot?
**Technically, you can be a first time home buyer more than once. Under the new Liberal government, there’s no limit to how many times you can use it.
For example, if you buy a home, then sell it, but you don’t buy a house again for another 4 full years. Let’s say you bought a home in 2015, sold it in 2020, rented until 2025 and then decided to buy a house. At that point, you could qualify as a first time home buyer (for the second time).
The other caveat is that if you used the HBP to buy your home in 2015, you have to have paid back those funds by the time you’re buying the next home for which you want to use the HBP again.
Keep in mind…
This is only an option. You don’t have to use your RRSP for your down payment. It’s a useful tool for people who are shy of their down payment amount without it, but do consider whether your retirement plan or strategy is in any way hurt by withdrawing the funds now and missing out on some of that growth opportunity.