What is a Home Buyer's Plan?

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For many, the dream of owning a home stands as a beacon of financial security and personal accomplishment. It's a significant milestone, one that often requires years of diligent saving and careful planning. Yet, in the ever-evolving landscape of real estate, there are tools and strategies available to help turn this dream into a reality sooner than you might think. One such tool is the First-Time Home Buyers’ Plan.

Understanding the Home Buyer's Plan

The Home Buyers' Plan (HBP) is a government program in Canada that allows eligible individuals to withdraw funds from their Registered Retirement Savings Plans (RRSPs) to use as a down payment on a first home. Here are a few things you need to understand about the HBP:

  1. Eligibility:
    1. To be eligible for the HBP, you must be a first-time homebuyer, or you and your spouse or common-law partner must not have owned a home that you lived in as your primary residence in the past four years.
    2. You must have an RRSP account, and the funds you plan to withdraw must have been in the RRSP for at least 90 days before the withdrawal.
    3. To participate in the HBP, you need to fill out a specific form (T1036) and provide it to your RRSP issuer.
    4. The HBP funds can be used as a down payment on a qualifying home. To qualify, the home must be intended as the primary residence of the HBP participants, must must both be Canadian residents.The HBP cannot be used for rental or investment properties.
  2. How Much Can You Withdraw?
    1. Under the HBP, you can withdraw up to $35,000 from your RRSP.
    2. If you're buying a home with a spouse or common-law partner who is also eligible, you can each withdraw up to $35,000, for a total of $70,000.
    3. Withdrawals made under the HBP are not subject to income tax, provided you meet the program's repayment requirements. However, if you fail to make the required annual repayments, the missed amount will be added to your taxable income for that year.
  3. Repayment:
    1. You are required to start repaying the HBP amount in the second year following the year of the withdrawal.
    2. The repayment period is up to 15 years, and you must make equal annual repayments.
    3. The repayments are made back into your RRSP, allowing you to rebuild your retirement savings.

Accessing Your RRSP for a Down Payment

One of the primary benefits of using the home buyers’ plan is that it allows you to access a significant amount of money. The HBP allows for withdrawals of up to $35,000 (or $70,000 for a couple) from your RRSP, which can be a substantial portion of your down payment.

While down payments can be difficult to save for, the HBP essentially provides you with an interest-free loan from your own RRSP—an excellent solution! Unlike traditional loans, you have 15 years to repay your RRSP withdrawal, which can make it more manageable than traditional loans. Furthermore, funds withdrawn under the HBP are not subject to income tax. This means you can use the money for your home purchase without incurring immediate tax liabilities.

Is the Home Buyer’s Plan Right for You?

While the First-Time Home Buyers’ Plan can be a great tool for aspiring homeowners, it may or may not be right for you. Before deciding to move forward with the HBP you may want to consider the following questions:

  1. Are you eligible for the HBP?
  2. What is your current financial situation (do you have enough funds in your RRSP to make the HBP a worthwhile choice)?
  3. Would the HBP allow you to achieve your home ownership goals at this time? (If your dream home is $1 million, and you have $50,000 saved for a down payment, taking out an additional $70,000 from your RRSP still won’t be enough to make the required 20% down payment of $200,000).
  4. Does using the HBP still allow you to meet your retirement goals?
  5. Do you have the capacity to repay your HBP withdrawal without incurring penalties or defaulting?

If you answered yes to all of those questions, the HBP is likely right for you. If you are still unsure however, it may be helpful to consult an expert. By working with a professional broker, you can get a better sense of your current mortgage eligibility, which may help direct your search for financing in the right direction. Contact Clover Mortgage today to start the pre-approval process, and determine the ideal down payment size for you.

Frequently Asked Questions (FAQ)

What happens if I don't pay back my home buyers plan?

Failing to repay your Home Buyers' Plan (HBP) can have significant financial and tax implications. The Home Buyers' Plan is designed to be a loan from your own Registered Retirement Savings Plan (RRSP), and it comes with specific rules and repayment requirements. If you don't adhere to these rules, you may face the following consequences:

  • Tax Consequences: The amount you withdraw from your RRSP under the HBP is intended to be repaid over a 15-year period, starting in the second year following the withdrawal. If you do not make your annual repayments, the Canada Revenue Agency (CRA) will treat the missed repayment as taxable income for that year. This means you'll have to include the missed repayment amount as part of your taxable income, and it will be subject to income tax.
  • Loss of RRSP Contribution Room: If you don't repay the withdrawn amount, you won't regain the RRSP contribution room you used to make the initial contribution. This can limit your ability to save for retirement in the future, as you won't have that contribution room available.
  • Penalties and Interest: In addition to the tax consequences, the CRA may assess penalties and interest on the missed HBP repayments. These charges can add up over time and further impact your financial situation.
  • Loss of Future HBP Eligibility: If you still have an outstanding balance from a previous HBP withdrawal, you may not be eligible to participate in the program again until the previous balance is fully repaid.
  • Legal Action: In extreme cases where individuals repeatedly fail to repay the HBP and do not take corrective action, the CRA may take legal steps to recover the outstanding amount.

To avoid these consequences, it's crucial to make your HBP repayments on time and in the correct amount. The CRA will provide you with an annual statement indicating your HBP balance and required repayment amount. Be sure to consult with a tax professional or financial advisor if you're facing difficulties in meeting your HBP repayment obligations to explore potential solutions or discuss your options with the CRA. It's essential to understand the rules and obligations associated with the HBP and to plan your finances accordingly to avoid potential financial setbacks in the future.

What are the benefits of home buyers plan Canada?

The Home Buyers' Plan (HBP) in Canada offers several benefits to eligible individuals who are looking to purchase a home. Here are some of the key benefits:

  • Access to Funds for a Down Payment: The HBP allows first-time homebuyers to withdraw up to $35,000 from their Registered Retirement Savings Plans (RRSPs) or $70,000 for a couple to use as a down payment on a home. This provides a significant source of funds that can make homeownership more accessible.
  • No Tax on Withdrawals: The funds withdrawn under the HBP are not subject to income tax, which means you can use them for your down payment without incurring additional tax liabilities.
  • Interest-Free Loan from Your RRSP: Essentially, the HBP provides you with an interest-free loan from your own RRSP. You are required to repay this loan over a 15-year period, starting the second year after the withdrawal. This repayment goes back into your RRSP account, allowing you to rebuild your retirement savings.

How long do you have to pay a home buyers plan?

You have up to 15 years to repay the Home Buyers' Plan (HBP) from the year following the year in which you made the withdrawal from your Registered Retirement Savings Plan (RRSP).

Steven Tulman
Written By Steven Tulman
“Making the process of getting a mortgage an easy and enjoyable experience for every Clover Mortgage client!”