Did you know that in Canada you can withdraw your RRSP to build or buy a qualifying home? If not, now you do! There are lots of programs in Canada that are designed to help young individuals save for their futures, make investments, and yes, even buy their first homes.
If that sounds like something you’re interested in, here are 10 things you should know before speaking to your financial representative:
Using Your RRSP for Down Payment
- It’s called an HBP
When you use your RRSPs to help you build or buy a home in Canada, you are doing it through something known as the HBP, or Home Buyers Plan.
With the average home in Canada selling for more than $530, 000, and with at least 20% required on a down payment, purchasing a home can be expensive and can seem out of reach – especially for first-time homebuyers.
The HBP is a federal program that is designed to bring the goal of buying a first home back into reach, allowing the buyer to withdraw up to $25, 000 tax-free from their RRSP accounts.
2. Couples can apply together
If you are building or purchasing a new home with your significant other, you can both apply to the Home Buyers Plan Program. If you are both eligible, you can each withdraw up to $25, 000 from your RRSP accounts. This means that when pooled together, you can withdraw up to $50, 000 and use it towards the purchase of your new home.
3. There’s a long list of conditions
Sound too good to be true? Like anything else that you apply for in Canada, there is a long list of conditions that must be true in order for you to qualify for the HBP. For example, in order to be eligible for the Home Buyers Plan you must:
- be considered a first time home buyer
- Have a written agreement to buy or build the home
- be a resident of Canada at the time the funds are withdrawn
- intend to live in the home for at least 1 year after purchase.
4. You must meet RRSP conditions too
In order to qualify for the HBP, you must not only meet the conditions of the plan, but also the conditions regarding your RRSPs. More specifically:
- You must receive all withdrawals within the same calendar year
- You must be the owner of the RRSP
- You cannot withdraw more than $35 000 from your RRSP
- Your contributions must have been in your RRSPs for at least 90 days before the withdrawal
- You cannot own the home for more than 30 days before withdrawal is made
- If you are part of a locked-in RRSP or group RRSP, you may not be eligible
And so on and so forth. You can speak to a financial representative to learn more about RRSP conditions surrounding the Home Buyers Program and to determine whether you qualify.
5. You can use the HBP to build or buy for a related person with a disability
Above we stated that in order to qualify for the Home Buyers Plan, you must intend to live in the home you buy or build for 1 year after purchase. There is one exemption to this rule – and that’s if you’re buying or building a home for someone with a disability who is related to you. In such a case, you must intend that the related person with a disability live in the home for at least 1 year following the purchase/build.
6. Homes must qualify too
In order to be able to take advantage of the Home Buyers Plan, the home you are building or buying must fall into the category of a “qualifying home”. As designated by the Government of Canada, a qualifying home can be any existing home or a home that is being constructed.
It can be a single-family home, a semi-detached home, a townhouse, a mobile home, an apartment/duplex, a triplex, a fourplex, a mobile home, or a condominium. The home must be located in Canada.
7. You need to pay it back
The Home Buyers Program is a great tool for purchasing your first home, but it’s not a free ride. It’s important to note that any funds you take out of your RRSPs need to be paid back within 15 years.
You can repay them back annually over the 15 years, or as a lump sum without penalty. But if they aren’t paid back within the given time limit, they will be taxed under your personal income.
8. It can save you money on taxes
Probably one of the biggest advantages of using the HBP is that anything you withdraw from your RRSP is tax-deductible. You can use any of the money that you receive back to help towards repayment over the 15 years (or for any other home-owning expenses that may arise).
9. There are downfalls too
Like anything else in the world, everything is give and take. While there are significant advantages of using the Home Buyers Plan, there are some downfalls too. Namely, you are raiding your retirement pot.
The whole point of an RRSP is to help you save for retirement, and you can earn interest on the money that you save. But if you remove the money from your savings plan, any interest that you would have gained within the 15 years of payback is lost.
With that being said, you can avoid losing interest on your money by repaying your RRSP’s quickly as opposed to over a 15-year period.
10. It’s difficult to opt out
If you are buying a new home and want to apply for the Home Buyers Program, you need to be absolutely sure that you want to participate. Once you are accepted for the program, it is difficult to cancel your participation.
You can only cancel your plan if you end up failing to buy/build a home, or if you lose Canadian citizenship before you buy or build. Otherwise, you cannot opt out of the program.
Whenever it comes to saving for a new home, it’s important to know your options. The Home Buyers Program is a great option for some people, but it’s not for everyone.
Speak to a financial representative that you trust to learn about different ways that you can save for a down payment on your first home. Then, compare your options before choosing the right path for you.
