If you intend on building or buying your first home, the Home Buyer’s Plan (HBP) can help you boost your down payment by temporarily withdrawing funds from your Registered Retirement Savings Plan (RRSP).
If you qualify as a first-time home buyer, you are eligible to a $35,000 one-time withdrawal from your RRSP. If you have a spouse, you can both use the HBP and withdraw up to $70,000. You will have 15 years to repay the withdrawn amount.
Who Can Apply
You can qualify for the HBP if…
- You are a first-time home buyer: According to the Canada Revenue Agency (CRA) you are considered a first home buyer if, in the four-year period, you did not occupy a home that you owned, or one that your current spouse or common-law partner owned. The four-year period begins on January 1st of the fourth year before the year you withdraw the funds.
- You are not a first-time home buyer but intend on purchasing a home for a relative with a disability. In this case, your relative with a disability must apply for the HBP withdrawal.
- You have a written agreement to buy or build a qualifying home
- You intend to occupy the home as your main residence within one year after its purchase. In the case that you bought or built the home for your relative with a disability, you must intend that they occupy the home as their main residence.
- You are a resident of Canada when you withdraw the funds from your RRSPs and up to the time you purchase the home
When can I withdraw?
You must occupy the home before October 1st on the year following your withdrawal. When buying a new home from a developer, fkeep an eye on the delivery schedule and time your withdrawal near the delivery date. Following a conventional 5%-5%-5% down payment schedule, just like our residential project La Tour Fides, you can plan for your withdrawal to coincide with your final down payment.
What if you already participated?
If you or your spouse (or common-law partner) have already withdrawn funds from your RRSP as part of this program, and still own the home, you will not be considered a first home buyer. To participate again, you must sell your home and move out and wait out the four-year period. If you sold your home in 2020, you would need to wait until 2025.
Withdrawing Your Funds
The funds must be in the account for at least 90 days before your withdrawal. Contact your RRSP issuer to book an appointment, or to make your online application. They may ask you to provide a proof that you will buy the home, for example an accepted proof of purchase or a preliminary contract with the developer. You will also need to sign Part A of Revenue Canada’s T1036 Form. The bank will then transfer the funds in the deposit accounts of your choosing.
Paying Yourself Back
Unlike your regular RRSP contributions, the HBP reimbursement is not tax deductible. For 15 years, you will need to transfer 1/15th of your initial HBP withdrawal back to your RRSP, and this will not affect your gross income.
The HBP is considered a “self-loan”. You are borrowing money from yourself in the future. The difference with other loans is that you pay no interest, but do not get any tax benefits and you miss out on possibly lucrative investments.
Pros: The Case in Favor of the Home Buyer’s Plan
For many first-time home buyers, the HBP is a unique opportunity to get their foot in the door. It allows them to make a bigger down payment, leading to less savings, a better chance of mortgage approval and possibly avoid paying the Canadian Mortgage and Housing Corporation (CMHC) mortgage insurance.
Less Interest and Mortgage Insurance Premiums
For example, say you are buying a home for $500,000. You have $75,000 readily available in your non-registered accounts for your initial 15% down payment. With a 2% annual interest rate on your 25-year mortgage, you will pay $1,850 every month. Because your down payment is below the 20% mark, you will have to pay a $11,900 CMHC mortgage insurance premium, representing 2.8% of your mortgage value. This would add $40 to your monthly mortgage payment.
Instead, you can apply for the HBP and withdraw $25,000 from your RRSP. Now, your down payment is 20% of the home value ($100,000), and you are exempt from CMHC insurance. In addition, your monthly mortgage slimmer, down to $1,693. Over the span of 25 years, you save $11,800 in insurance and $9,976, for a total of $21,776.
Better Debt Service Ratio
Financial institutions use the CMHC’s guidelines to calculate if a borrower will afford a mortgage.
The CMHC’s benchmark gross debt service ratio for home expenses is 39%, and 44% for total debt service ratio, which also includes other credit cards, car loans and other debt. This ratio is a percentage obtained by dividing your expenses by your gross income.
Supposing your household income is currently $75,000 ($6,250/month), here is a comparative table for debt service ratio for both down payments (75K vs 100K):
|Monthly||75K Down||$100K Down|
|Credit cards and Other Loans||$300||$300|
|Gross Debt Service||39%||37%|
|Total Debt Service||44%||42%|
The $25,000 difference, valued at 5% of the home’s total value, can take you from shaky grounds (39% GDS and 44% TDS) with the smaller down payment to a more comfortable position (37% GDS and 42% TDS), below the CMHC threshold.
Read our article on mortgage rates and gross debt service ratio.
A Unique Opportunity
The HBP is a financial instrument you can only use once in your lifetime, barring some exceptions. It can help you increase your leverage to get a home that is more tailored to your long-term needs – with more rooms/features or in a more desirable location, if you wish to do so.
Assessing Your Own Situation
Before making a decision on the home buyer’s plan, we recommend you look at the fundamentals of your home purchase, update your budget and crunch the numbers. Remember that it’s a one-time opportunity to withdraw from your RRSP without being taxed.
We hope this article sheds light on how the Home Buyer’s plan works, and why you should (or shouldn’t) take advantage of it. It’s a major decision, so we recommend you speak with your RRSP specialist and mortgage advisor to address specific questions.