Are you a potential first-time home buyer looking for ways to make it easier to buy a home?
Unfortunately, rising housing costs and tougher lending rules are making it next to impossible for many first-time Canadian homebuyers to achieve this milestone.
The RRSP first-time Home Buyer’s Plan (HBP) is a government program designed to help eligible first-time homebuyers to withdraw money from their Registered Retirement Savings Plan (RRSP) without incurring taxes or penalties on their purchases.
But before you decide to raid your retirement fund to buy your first home, let’s review the pros and cons of making such a big decision.
What Is An RRSP?
Let’s begin with the basics. An RRSP is a retirement savings plan designed to help Canadians build a nest egg for their retirement. It incentivizes Canadians to contribute to the plan by offering them an opportunity to grow their wealth while deferring the taxes on any earnings in their RRSP.
You can contribute 18% of your income or a limit defined for that year, depending on whichever is less, to your RRSP. The 2023 RRSP maximum contribution limit is $30,780. Additionally, RRSP contributions are made with pre-tax dollars and are tax-deductible.
RRSP Contribution Example: Suppose you earned $60,000 in a year and contributed $10,800 to your RRSP. Since the RRSP contribution is tax-deductible, you will need to pay taxes on your annual income minus your RRSP contribution. Thus, you will need to pay income tax on $49,200 instead of the full $60,000 ($60,000 – $10,800).
You can invest your RRSP in mutual funds, exchange-traded funds (ETFs), bonds, Guaranteed Income Certificates (GICs), stocks, and cash.
Any capital gains on your investments will not be taxed while they remain in your RRSP. The remaining amount invested in different securities within your RRSP can help you accumulate a substantial amount over time through interest, capital gains, and dividend income, making it a wise long-term decision.
Withdrawing from your RRSP before retirement will result in you incurring a withholding tax. The bank will immediately withhold the tax on your withdrawal and give it to the government.
However, becoming a first-time homebuyer who is putting the money towards buying a home is one of the rare exceptions to this rule.
What Is The RRSP First-Time Home Buyer’s Plan?
Now, let’s understand the RRSP first-time home buyers’ plan. The Canadian government introduced HBP in 1992 to help more Canadians get into the real estate market.
HBP allows people who have funds in their RRSP to withdraw money from their account without incurring taxes and put it towards the down payment of their first home.
An individual can withdraw up to $35,000 from their RRSP to contribute to the down payment for their home.
HBP Example: If you and your common-law partner are both first-time homebuyers and planning to purchase a home together, you can both access the HBP for a combined total of $70,000.
The HBP is not precisely a grant offered by the government. Instead, you are effectively taking out a loan from yourself. Since it is a loan, you must pay it back to yourself over 15 years after withdrawing the amount.
How To Qualify For The RRSP First-Time Home Buyers’ Plan
You need to meet several requirements to become eligible for the HBP.
- The first requirement is that you have to be a Canadian citizen.
- Second, you must sign an agreement stating that the funds you withdraw from your RRSP through the HBP go towards purchasing your first home. The HBP entitles you to a one-time withdrawal from your RRSP for up to $35,000 to put towards the down payment.
- The funds you withdraw from your RRSP must have been stored in your account for at least 90 days before withdrawal.
- You must withdraw the amount from your RRSP within 30 days of taking the title of the home.
Qualifying for the HBP also requires that the buyers have a minimum down payment of 5% of the home’s total purchase price, and the household income must be below $120,000.
Who Is Considered A First-Time Home Buyer In Canada?
You must be considered a first-time home buyer in Canada to qualify for the HBP withdrawal from your RRSP.
However, you don’t technically need to be a first-time homebuyer to use the HBP. You can take advantage of the government program more than once by following the four-year rule.
If you wait four years between home purchases and completely pay back the first withdrawal to your RRSP, you can use the RRSP first-time home buyers’ plan again.
In addition, if you are related to a person with a disability, you can gift them the money from your RRSP.
The key rule to note here is that whoever benefits from the HBP must live at the property as their primary residence. Also, consider additional costs such as performing pre-inspections.
Do First-Time Home Buyers Need A Down Payment?
There used to be a time when first-time homebuyers could apply for a mortgage without worrying about making a down payment. But, unfortunately, mortgage lending rules have become stricter in the last 15 years.
Under the new regulations, potential first-time homebuyers must have at least 5% of the total purchase amount to put towards the down payment on homes worth $500,000 or less.
The down payment requirement is different for homes worth over $500,000. The minimum down payment is 5% for the first $500,000 and 10% for the amount beyond that.
Rules For RRSP First-Time Home Buyers’ Plan Repayment
As I have mentioned already, the HBP is technically a loan that you have taken from yourself and must eventually repay in full. Here are some of the highlights:
- People who withdraw from their RRSP to put towards the down payment for a home get 15 years to pay back the entire loan.
- Any repayments you make to your RRSP will be considered a repayment of the loan. It means that the amount you contribute to your RRSP to repay the HBP loan will not be tax-deductible as when you initially contributed the money. Therefore, you cannot claim it as an RRSP contribution during tax season.
- You must make payments each year. You can easily calculate the minimum annual amount you need to repay by dividing the total withdrawal amount by the repayment term. For instance, if you withdrew $30,000 from your RRSP to purchase your home, you will need to repay at least $2,000 each year.
- You can repay more than the minimum amount to reduce the repayment term. Alternatively, you can claim any additional amounts you deposit as tax-deductible RRSP contributions and stick to the original repayment term.
- Failing to repay the annual minimum would result in the amount being added to your yearly income for the year as taxable income.
Withdrawing Money From Your RRSP Under The First-Time Home Buyers’ Plan
Withdrawing money under the RRSP first-time HBP is more complicated than merely asking your bank to transfer the money for you to use as a down payment for your home.
You will need to download and fill out the T1036 Home Buyers’ Plan request form to Withdraw Funds from an RRSP form on the Canada Revenue Agency (CRA) website.
You can print out the form or use the fillable or savable option. You will need several T1036 HBP Request forms if you have multiple RRSP accounts.
Suppose you have money in an RRSP investment account and an RRSP savings account, and you need to withdraw money from both to contribute to the down payment.
In that case, you will need to fill out and submit two forms. The form is a single page that consists of two sections: Area 1 and Area 2.
You must fill out the details in Area 1 as the homebuyer and submit the form to your bank. The bank will then fill out Area 2 and move the money from your RRSP to your desired account. The process may take a few days to complete.
Once the bank transfers the money into your account, you can use it to pay down your home. Your financial institution will issue you a T4RSP form near tax season or immediately.
This form confirms the amount you withdrew from your RRSP under the HBP. It can help ensure that no tax is withheld on your withdrawals when you file your taxes that year.
It is crucial to be prompt about making your withdrawal. If you fail to make the withdrawal within 30 days of taking the home’s title, you will no longer be eligible for the HBP.
Advantages And Disadvantages Of RRSP First-Time Home Buyers’ Plan
This section of my RRSP first-time Home Buyers’ Plan guide will discuss the advantages and disadvantages of taking this loan from yourself to contribute to buying a home.
Should you tap into the RRSP Home Buyers’ Plan? The answer to this question is never easy, and it can be different for everyone, depending on their situation.
Tallying the pros and cons of the RRSP first-time home buyers’ plan can help you make the most suitable decision for yourself.
Advantages Of RRSP First-Time HBP
- The HBP is effectively an interest-free loan that you can take from yourself.
- The funds can go towards the down payment for your new home and help you get closer to your goal of becoming a homeowner.
- You can reuse the HBP for another purchase under the four-year rule.
- There is no maximum payback limit, so you can repay the entire loan immediately if you prefer.
Disadvantages Of RRSP First-Time HBP
- While the money you withdraw is not a traditional debt because it is interest-free, it is still a loan that you will need to repay within 15 years.
- A poorly timed withdrawal could result in you losing out on significant tax-sheltered investment growth.
- Taking out the money from your RRSP means that you are losing out on the substantial income you could earn through compound interest on that money if it remains invested in your RRSP.
- The RRSP contributions to pay back the HBP loan will not count towards a deduction from your taxable income.
Saving For A Down Payment In An RRSP
You could consider saving money for your down payment in an RRSP high-interest savings account. All the contributions you make to the RRSP will be tax-deductible, but it might not necessarily interfere with any investments in your RRSP investment account.
Taking out money from an RRSP investment account can impede the compound interest income and tax-deferred wealth growth and result in the loss of more significant potential long-term profits.
When you consciously save money in your RRSP savings account to use it as a down payment for your first home and focus on a portfolio of high-quality and income-generating assets in your RRSP investment account, you can stay in line with your long-term wealth growth goals. You can also save the necessary cash for a down payment in another account.
RRSP First-Time Home Buyers’ Plan – The Verdict
The RRSP Home Buyers’ Plan is an excellent way to increase the amount of down payment you can put towards buying your first home because it effectively gives you an interest-free loan that you can use for that purpose.
Unfortunately, it also means withdrawing money from your RRSP, which could have provided you with substantial compound interest that could accumulate for your retirement, especially if you take the full 15 years to repay the amount.
It is not a good idea to permanently raid your retirement fund to become a homeowner. If you doubt that you can make RRSP contributions and repay the money quickly, I would advise thinking twice about taking out the HBP loan.
If you want to take out the HBP loan quickly rebuild your retirement savings faster, I recommend opening an account with a robo-advisor.
Learn more about the RRSP and what you can do with it in this ultimate guide.