The Government of Canada Home Buyers’ Plan was created to help Canadians, looking to buy their first home, find the money for their down payment. In Canada, if you want to buy a house, you must put a down payment of 5% of the purchase price of the house. 5% being the minimum required, it is recommended to make a down payment of 20% or more. Those making a down payment below 20% will have a high mortgage rate and insurance required. For some Canadians, this 20% rule can make the task of saving for a difficult down payment. The Home Buyers’ Plan is designed to allow first-time homebuyers to withdraw money from their RRSP, tax-free, for a down payment. Let’s take a look at the Home Buyers’ Plan so you can make the best possible decision based on your financial situation.
What is the Home Ownership Plan?
To participate in the HBP, you must have an RRSP and have money. An RRSP is a type of savings account designed to help Canadians save for their retirement. Many people think that RRSPs are tax free, but in reality they are taxed. This means that when you withdraw from your RRSPs in the future, you will be taxed. The HBP allows you to withdraw from your RRSP and not be taxed. You are therefore granting an interest-free and non-taxed loan but will have to repay the amount taken from your RRSP.
How do I know if I am eligible?
If you are buying your first home, you are probably eligible to participate in the HBP. For those who have already owned a home or lived in a home purchased by their partner, it is still possible to qualify for the HBP. If you are looking to buy a house this year (2016), you may not have owned (or lived in) a house in the last 4 years. Aside from this requirement, there are some other conditions that you must meet:
- You must be a Canadian citizen or permanent resident.
- You will need to obtain a written agreement stating that you are buying a home that qualifies you for the HBP.
- You must be the main resident of the house you buy.
- If you have used the HBP to buy a home in the past, you should not have outstanding balances.
Is there a limit to the amount I can withdraw from my RRSP?
Yes, you can not withdraw more than $ 25,000 to buy a house through the HBP.
I would like to buy a house with my spouse; can we both participate in RAP?
Yes. You can withdraw up to $ 25,000 from your respective RRSPs.
I am eligible to participate in the HBP, but my partner is not, how will it affect us?
A person who is eligible to participate in the HBP can always withdraw up to $ 25,000 from their RRSP, even if the other person with whom they buy a home is not eligible.
What to expect from the PCR process?
The bank or financial institution you are dealing with will be able to help you with the HBP process, but here are some important things to know and keep in mind:
- The money you plan to withdraw from your RRSP must be in your RRSP account for at least 90 days.
- You must withdraw your RRSP within 30 days of taking possession of your home. After 30 days, the money you withdraw will not be eligible for the use of the HBP.
- You will need to complete a T1036 form; Your lender should be able to help you with that.
Can I withdraw from RAP?
If you have withdrawn the money from your RRSP and bought or built an eligible home, you can not withdraw the HBP.
Refund of withdrawal from your RRSP
The money you withdraw from your RRSP to participate in the Canadian HBP is like a loan, you lend yourself money for your down payment on a property. You must repay it.
- You will not need to start repaying your RRSP until 2 years after the initial withdrawal
- After the 2 year grace period, you will have a maximum of Remember that the government treats this as a loan, so you will be aware of your payments.
- If you do not make the minimum payments, which is the total amount you withdraw from your RRSP divided by 15, the amount you do not repay will be taxed as income.
More in-depth overview of repayment of an HBP
Say you were able to withdraw the maximum $ 25,000 from your RRSP to make a down payment on your home. Since the goal of the HBP is to get tax-free money, the total amount of money you have to repay is $ 25,000. You must repay this amount in full for a period of 15 years. Here’s how you can calculate your minimum annual payments.
$ 25,000 / 15 (years) = $ 1,666.66 per year
Know that this is simply the minimum amount you are required to pay. If you have the money, you can still pay it back sooner.
What is the right choice for you?
Whether or not you choose to use the Home Ownership Plan depends on your financial situation, your financial needs and how you see your financial future. We can not make the decision for you, but here are some things you should consider before making your final decision.
- Will you be able to make the annual minimum payments?
- Is it very important for you to have a larger down payment to avoid high rate mortgage insurance?
- Is participation in the HBP the only way you can afford a reasonable down payment?
- Is increasing your tax-free RRSP more advantageous than a higher down payment?
Buying your first home involves a heavy financial burden, and the Canadian Home Buyers’ Plan can be a great way to help with some of this burden. Once again, the decision is personal; Just make sure you weigh in and out according to your financial situation.