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Paying for Your First Home with the Home Buyers’ Plan

Use Your RRSP To Buy Your First Home

Ready to buy your first home, but not quite ready to afford a sizable down payment? If you’ve stashed cash for retirement but not real estate, you might be in luck. In Canada, you don’t have to choose between saving for retirement and investing in your first home.

If you contribute to a Registered Retirement Savings Plan (RRSP), you may already qualify for a program that lets you dip into your retirement funds early without a penalty.

The Home Buyers’ Plan (HBP) is a convenient way for some first-time home buyers to achieve their dreams now without sacrificing their plans for later. It could be the right choice for you, too. Learn how the home buyers plan works, from the qualification process all the way to repayment plans and retirement.

What is the Home Buyers’ Plan?

Designed to make home ownership more accessible for working Canadians, the Home Buyers’ Plan is a program that turns your retirement savings into cash for buying a home. If you and the property both qualify, you may use this plan to take up to $35,000 out of your RRSP within one calendar year.

Of course, not everyone is eligible for the RRSP Home Buyers’ Plan, and not every qualifying home buyer chooses to take advantage of it. Make sure you understand the eligibility requirements, withdrawal and repayment terms, tax rules, and other conditions before participating in the plan and withdrawing from your RRSP.

Advantages of the Home Buyers Plan

Why choose the HBP over other programs and methods of saving, like a Tax-Free Savings Account (TFSA)? You don’t pay tax on a TFSA, after all, so what advantage does the HBP offer?

Simply put, because the HBP uses RRSP funds, you’re not only able to save for retirement and a home down payment simultaneously, you also get a nice tax break with the contributions you make to your RRSP. TFSA’s don’t offer this tax break. While they are exempt from taxes when you make a withdrawal or deposit, you don’t get that extra break offered by RRSP contributions.

You don’t have to pay interest on your HBP funds, either. Because you’re essentially borrowing the funds from yourself, the repayment terms are generous, and the interest is nonexistent. The money does stop compounding in your RRSP, but that impact is smaller if your home increases in value or you repay the money early.

Do You Qualify?

Are you a qualifying first-time home buyer? If you’re interested in paying for your first home with help from your RRSP, start by making sure you’re eligible.

You must meet the following requirements to withdraw from your RRSP:

  • Never purchased a home, or haven’t occupied a home you own in at least four years (both groups qualify as “first-time homebuyers”)
  • Live in Canada
  • Agree to build or buy your first home by October 1 of the year after your first withdrawal (if applicable)
  • Withdraw funds within 30 days of owning the home
  • Agree to live in the home as your principal residence

There are some exceptions to these requirements, though. For example, if you have a disability or you’re using the funds to help a disabled person buy a home, you don’t have to be a first-time home buyer.

What is an Eligible Home?

Most properties qualify for the home buyers plan. It’s when and how you purchase your home that matters. You must be the one buying or building it, for starters. And you already purchased the home, you must withdraw funds within 30 days of owning it.

If you don’t own the home yet but you want to withdraw funds this year, you must buy or build it before October 1 of next year.

What to Know Before You Withdraw from Your RRSP

Before you decide to withdraw from your RRSP, it’s important to understand all the terms. For example, how do you pay back an HBP loan? How do you qualify in the first place? Before you fill out your T1036 – the official request to withdraw funds – make sure you have the answers to these questions.

One rule to know: you have 15 years to repay yourself after withdrawing funds. You can get the funds after you own the home, but only 30 days afterwards, so most people withdraw before buying or building. When you start repaying the loan, you must repay at least 1/15 of the total amount you withdrew each year.

Is the Home Buyers’ Plan the right move for you? As you navigate the mortgage pre-approval process, this extra source of savings could make the difference between your potential price range and interest rates. Make sure you explore this option before you commit.  The Home Buyers’ Plan makes it possible for more Canadians to make investments that will pay off for years to come.

If you contribute to your RRSP from now until the March 1st deadline, that contribution will help lower your 2018 taxable income. For many salaried employees, this means you’ll likely get some money back from the government come the spring… which can help with your down payment!

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