Purchasing a home is one of the most significant financial milestones for the average Canadian. Unfortunately, the cost of buying a home is a substantial one, and many people may not be able to afford the required down payment for a home purchase. To help Canadians afford the homes of their dreams, the Canadian government introduced the Home Buyers’ Plan (HBP).
The Home Buyers’ Plan is a program that enables Canadian residents access money from their Registered Retirement Savings Plan (RRSP) to purchase a qualifying home. While you are allowed to withdraw from the contributions that you made into your RRSP, it is treated as a loan. You are expected to pay back within a 15-year period that begins two years following the calendar year in which you make the withdrawal.
If you have contributed into a locked-in RRSP or a group RRSP, you may not be able to withdraw money from these types of retirement accounts towards buying a home. If you own multiple RRSP accounts, you would be able to use funds from them under the Home Buyers’ Plan up to a limit of $35,000. For couples, this sums up to a withdrawal limit of $70,000.
There are a few requirements that need to be met for you to qualify for the Home Buyers’ plan, some of which include:
First time home buyer: To qualify for a Home Buyers’ Plan and withdraw money from your RRSP to finance a mortgage, you have to be a first-time home buyer. As a first-time home buyer, you have not occupied a home that was owned by you or your current spouse or common law partner within a period which starts on January 1st, four years before the year you withdraw the funds, and ends 31 days before the date you withdraw the funds from your RRSP towards the Home Buyers’ Plan.
If this sounds confusing, here’s a simple example: if you intend to withdraw money from your RRSP for a mortgage down payment through the Home Buyers’ Plan on June 30th, 2021, you would not have occupied a home owned by you and your spouse or common law partner within a four-year period from January 1st, 2016 to May 30th, 2021.
If you do not qualify for a Home Buyers’ Plan because you do not meet the first-time home buyer requirement, you may be able to re-apply later after the four-year period has passed.
Possess a buy or build agreement: An additional requirement for the Home Buyers’ Plan is that you need a written agreement that shows you intend to buy or build a qualifying home. A qualifying home is any housing unit already existing or being constructed in Canada.
Also, a share in a co-operative housing corporation can qualify under the HBP if it gives you an equity interest in a housing unit and not just a right to tenancy.
Canadian residency: You need to be a resident of Canada to withdraw funds from your RRSP without tax penalties under the HBP. This also applies to the time when you buy or build a qualifying home. The Government of Canada provides guidelines to determine if you are considered a resident of Canada.
Primary residence: Within a year of buying or building your qualifying housing unit, you are required to live in the home as your principal place of residence.
Before you use the Home Buyers’ plan to finance your mortgage, you need to ensure that you are capable of paying back the loan alongside your mortgage. The repayments for the amount you borrow is spread across 15 years and starts two years after the withdrawal from your RRSP. For example, if you borrow the maximum amount of $35,000, you would be required to pay back $2,333.33 ($35,000/15) annually. Failure to make your home buyers’ loan repayments would result in that amount being taxed in your hands. The federal government provides statements that outline your repayments and outstanding balance.
Flexibility: Even if you have previously used the HBP to finance a mortgage, you may still qualify for another Home Buyers’ Plan. The stipulation is that you have paid off the previous HBP balance by the beginning of the year you intend to make another withdrawal, and all other conditions are met.
Tax Benefit: The Home Buyers’ Plan's tax advantage is a huge relief for the average Canadian who has saved up some money in an RRSP. You can withdraw the money needed for a down payment without being taxed. Even if you have put some money for a down payment in a regular savings account, you can reduce your taxes for the applicable year if you transfer it into your RRSP (within your contribution limit) and later withdraw this money. This is only recommended provided the money is contributed into the RRSP at least 90 days before you intend to withdraw it.
Generally, you may not be able to cancel your participation in a HBP if you had met all the requirements and gone further to withdraw the funds. However, certain exceptions may apply, such as:
If you choose to cancel the loan from your RRSP, the initial withdrawal amount would not be subject to tax provided that you repay the full amount.
Generally, you would need a down payment of at least 5 percent to purchase a home, even better, putting a 20 percent down payment allows you to bypass the mortgage loan insurance, allowing you to own more equity in your home. The challenge of getting this down payment can be minimized by withdrawing money from your RRSP. It is important to note that although technically this money belongs to you, you still have to make repayments within 15 years. Additionally, you need to make the withdrawals within 30 days of closing and taking the title of your qualifying home to avoid huge tax hits. You have the responsibility to ensure that you have met all conditions required for using your RRSP to finance a mortgage.
If you do not qualify for a Home Buyers’ Plan or decide not to go this route for financing your mortgage, you can utlitize an alternative means through the RRSP mortgage.
How does this work? This form of mortgage financing usually works with a self-directed RRSP that has a significant amount of cash held in it or assets that you can convert to cash. Self directed mortgages are generally issued by a bank or trust and insured through the CMHC. Your mortgage is an eligible investment through you RRSP, you would make regular payments into the RRSP instead of a financial institution. These payments can then be used to invest in other assets in the RRSP. To hold your mortgage in your RRSP, you would be required to meet all basic requirements as in a regular mortgage such as income verification, credit check and property title etc.
There are a number of pros and cons to this strategy that must be considered, including:
Pros:
Cons:
It is important to note that although you own the mortgage, a default in payments may result in a foreclosure buy the trust or bank.
