Buying your first home is an exciting, if not an overwhelming, exercise. You save and visualize that dream home, then, your search and select your options. And with fingers crossed, you put in your offer. Ideally, the next steps are buying, moving in, and starting to build your life. The first-time homebuyer RRSP can help Canadians get to this destination.
Over the last number of years, the government has introduced a number of incentives and opportunities to encourage potential homeowners to get into their first house. The incentives empower those who might not otherwise be able to afford a first home to get into the real estate market. The incentives have changed since their introduction to ensure they benefit, not hinder, the real estate market. However, they continue to help Canadians buy their first home.
Try this Mortgage Calculator
What Is The Home Buyers’ Plan?
In 1992, the Canadian government introduced the Home Buyers’ Plan (HBP) as a way to help Canadians get into the real estate market. The HBP allows people with funds in a Registered Retirement Savings Plan (RRSP), to withdraw money from their account — tax-free — to put towards the purchase of a first home.
While the fund withdrawal is tax-free, it does need to be paid back, in full. In addition, the funds must be invested in your RRSP for a period of time before you can access it without taking a tax hit.
The federal government recently increased the RRSP withdrawal limit for the HBP to $35,000.
While the HBP is technically your money, it is considered a loan that you pay back. You make a minimum contribution to repay the funds every year, with the exception of the first tax year after you initially make the withdrawal. You have 15 years to repay the entirety of the funds to your RRSP.
How Do I Qualify For The First-Time Home Buyers’ Plan?
To qualify for the HBP, first and foremost, you must be a Canadian citizen. In addition, the funds must go towards the purchase of a first home. The HBP allows one-time withdrawals of up to $35,000 to put towards the purchase of the home. The funds must live in your RRSP account for a minimum of 90 days before you withdraw them. The RRSP withdrawal must happen within 30 days of taking the title of the home.
If you purchase a property with someone who has also never owned a home, they too can withdraw $35,000 from their RRSP for a total down payment of $50,000.
In order to qualify for the HBP, buyers must have a minimum down payment of 5% of the total purchase price of the home. And, household income must be under $120,000.
Who Qualifies As A First-Time Home Buyer In Canada?
To qualify as a first-time home buyer in Canada, you can never have owned property of any kind. If you purchase a first home with a partner who has purchased a home in the past, you can still withdraw from your RRSP as a first-time homebuyer. Your partner, however, cannot.
First-Time Home Buyer RRSP Repayment Rules
While you withdraw your own money, the HBP is technically a loan. Therefore, you must pay it back. People who withdraw from their RRSP to buy a first home have 15 years to pay the entirety of the loan back. Any repayments to your RRSP are considered a repayment of the loan. Therefore, they do not enjoy the same tax benefit as the initial investment. To clarify, you cannot claim it as an RRSP contribution.
You must make payments each and every year. To calculate the minimum annual requirement, divide the total withdrawal amount by 15 years (the maximum repayment term). For example, if you withdraw $15,000 from your RRSP for the purchase of your home, your minimum repayment every year is $1,000. Anything above and beyond that minimum goes towards your HBP repayment. Alternatively, you can claim it on your RRSP, and thus it is tax-deductible.
If you do not repay the annual minimum, that amount is added to your income as a taxable income.
Are There Any First-Time Home Buyer Incentives?
In March of 2019, the federal government announced an incentive to aid first-time home buyers. The incentive, detailed below, recently took effect. It aims to spur the buying power of those who otherwise can’t afford to buy their first home.
First-Time Home Buyers’ Incentive
In the fall of 2019, the First Time Home Buyers’ Incentive took effect. It puts more home-buying power into the hands of Canadians. The program, administered by the Canadian Mortgage and Housing Corporation (CMHC), is a shared-equity mortgage with the federal government. It provides 5% to 10% of the value of the home towards the purchase price. When and if the property is sold, this incentive is paid back to the CMHC.
While the government helps support the purchase of a first home, buyers are still subject to the “stress test” regulations set forth by Ottawa. That means homeowners need to prove they can withstand an increase in interest rates for a period of five years in order to qualify.
To get a good idea of what budget you’re working with, calculate your maximum purchase price with this calculator.
What Other Programs Are Available For First-Time Home Buyers?
In addition to the new incentive introduced in 2019, and the Home Buyers’ Plan, the federal government offers a couple of other great incentives. Each aims to reduce the financial stress associated with buying a first home.
This tax credit provides at $5,000, non-refundable credit on your income tax on a qualified home purchase. The maximum available benefit is $750 in federal tax relief.
Depending on your individual situation, you may qualify for a GST/HST rebate on the purchase price of your home.
How Do I Withdraw From My RRSP As A First Time Home Buyer?
To make an RRSP withdrawal to buy your first home, you fill out Form T1036. Each time you withdraw from your RRSP, you must fill out that form. You fill out section 1 and return the forms to the issuer of your RRSP. Then, the issuer fills out section 2 and submits it on your behalf.
Can You Use The Home Buyers’ Plan More Than Once?
Yes! Previously, the HBP was only for those who had never owned a home. But in 1999, the rules changed to allow for a lapse in homeownership. This resets your status as a new homeowner. To clarify, if you haven’t owned a home in any capacity for a four-year period, you may qualify for RRSP withdrawals under the HBP.
Pros of taking advantage of the Home Buyers’ Plan
- It’s an interest-free loan you lend to yourself
- It lowers your taxable income by claiming contributions
- The funds go towards your house down payment
Disadvantages of the Home Buyers’ Plan
- You are removing funds from your retirement savings
- By removing funds, you are foregoing interest you might have earned had the funds remained invested
- You pay it back in full and RRSP contributions to pay back the HBP don’t count towards a deduction
Do First-Time Home Buyers Need A Down Payment?
The down payment rules for first-time homebuyers have changed over the last 15 years. There was a time when first-time homeowners could apply for a mortgage with a zero down payment. But today, you need at least 5% of the purchase price to put towards the purchase of a home that is $500,000 or less. However, for a home that costs between $500,000 and $1 million, the minimum downpayment is 5% on the first $500,000 and 10% on the amount between $500,00 and $1 million.
Buying your first home is likely one of the largest purchases you will ever make. And it can be quite difficult to get into the real estate market. But knowing the available options can help you on your journey. Government benefits, like the HBP, exist to make it a little bit easier for Canadians to realize the dream of homeownership.