What Is The Home Buyers Plan?
The Home Buyers Plan (HBP) allows first-time homebuyers to borrow from their RRSPs for a down payment. It allows first-time homebuyers to borrow $25,000 from their RRSP tax-free. The only catch is that this $25,000 must be paid back over 15 years following the withdrawal. Don’t think of the HBP as free money; it’s more like a loan to yourself.
Why Bother With The Home Buyer’s Plan?
Your RRSP is a resource that you should take advantage of when need be. Many of us have automatic contributions made to our RRSPs done on our behalf by our employers and that money is effectively locked in until retirement. It’s important to save of course, but not having access to all your funds can make purchasing a home difficult. Fortunately, the HBP allows you to access that locked-in money with no tax penalty.
HBP Eligibility Requirements
- You must be a first-time homebuyer
- You must enter into a written agreement to buy or build a home
- You must be a Canadian resident
- You must use the home as your principal residence
- You cannot own the home for more than 30 days before your HBP withdrawal
- You have to build or buy your home before October 1 of the year following your withdrawal
What Is The HBP Withdrawal Process Like?
To make an HBP withdrawal, you must complete a T1036 form. You then bring this form to your RRSP administrator (most likely your bank) and they will take out your money so it’s not subject to RRSP withholding tax.
Beginning in the year following your withdrawal, you must repay your RRSP 1/15 of what you took out every year. For example, if you withdrew $15,000, you must repay at least $1000 annually. To let the CRA know that you’ve made a repayment to your RRSP, you must fill out the CRA Schedule 7 form.
HBP Pros
- This money has been tax-sheltered, meaning there’s more of it
- This money is normally not accessible to you until retirement
- HBP’s loan terms are generous – you don’t have to start paying until about a year and a half after your home purchase
- If you’d like to pay your loan early while you have the cash to do so, you can – there’s no penalty for paying ahead of schedule
- You’ll never get a better interest rate – the HBP is an interest-free loan to yourself over 15 years
HBP Cons
- It’s still a debt that you have to pay
- There is a lost opportunity cost of RRSP investments – the $25,000 you take out now doesn’t get a chance to grow tax-sheltered
- If you have paper losses in your RRSP portfolio, you could be turning those paper losses into real losses by selling investments and withdrawing them
- There are time constraints involved, i.e. you must apply for your HBP before you live in your home for more than 30 days
About Collin Bruce
Collin Bruce is a mortgage broker/agent located in Edmonton Alberta. We match home buyers with mortgages and mortgage insurance that fit their needs. If you’re looking to buy a home, get in touch, we’ll set you upright.
