From scrolling through the Realtor app to crossing your fingers while putting in your offer, buying your first home is an exciting, if not overwhelming, exercise. And, like many Canadians, you might benefit from a bit of extra help when it comes to that ever-important downpayment. Luckily, The Home Buyers’ Plan (HBP) is a great option to have at your disposal.
Table of contents
- What is The Home Buyers’ Plan?
- How do I qualify for The Home Buyers’ Plan?
- How does The Home Buyers’ Plan work?
- How to repay The Home Buyers’ Plan
- Can you use The Home Buyers’ Plan more than once?
- Is The Home Buyers’ Plan worth it?
- Do first-time home buyers need a downpayment?
- What other programs are available for first-time home buyers?
What is The Home Buyers’ Plan?
Over the last number of years, the Canadian government has introduced a number of incentives designed to encourage potential homeowners to get into their first house. These incentives empower those who might not otherwise be able to afford a first home, to get into the real estate market.
In 1992, The Home Buyers’ Plan (HBP) was introduced as a way to help Canadians get into the real estate market. In a nutshell, the HBP allows people with funds in a Registered Retirement Savings Plan (RRSP), to withdraw up to $35,000 tax-free from their account, to put it towards the purchase or even the constructions of a first home. This purchase can be for themselves, or for a related person with a disability.
While the fund withdrawal is tax-free, it does need to be paid back, in full, within 15 years. In addition, the funds must be invested in your RRSP for 90 days before you can access it without taking a tax hit. This withdrawal must happen within 30 days of taking the title of the home
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.
How do I qualify for The 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.
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 $70,000.
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 your household income must be under $120,000.
Finally, per the government, “you must intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.”
Recommended resource: Try our Mortgage Calculator
How does The Home Buyers’ Plan work?
To make an RRSP withdrawal to buy your first home, you must fill out Form T1036 from the Canada Revenue Agency. 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 to the CRA on your behalf.
FYI: Each time you withdraw from your RRSP, you must fill out that form (eg. the Lifelong Learning Plan).
How to repay The Home Buyers’ Plan
While you withdraw your own money, the HBP is technically a loan. Therefore, you must pay it back. As mentioned above, you have 15 years to pay the entirety of the loan back. Any repayments to your RRSP are considered a repayment of the loan, so they do not enjoy the same tax benefit as your initial investment. To clarify, you cannot claim it as an RRSP contribution.
You must make payments 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.
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.
Is The Home Buyers’ Plan worth it?
Like many financial decisions, the HBP comes with plenty of pros and cons. On the one hand, it can help you get into the real estate game. On the other hand, you’ve worked hard to save for your future retirement.
Let’s look at other pros and cons:
Pros 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 — already a pretty hefty sum.
Cons 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 must 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 downpayment?
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 zero down payment. Today, however, you’ll need at least 5% of the purchase price to put towards the purchase of a home that is $500,000 or less.
For a home that costs between $500,000 and $1 million — increasingly common in the current real estate landscape coast-to-coast — the minimum downpayment is 5% on the first $500,000 and 10% on the amount between $500,00 and $1 million.
What other programs are available for first-time home buyers?
Let’s be honest: saving up for a downpayment is tough. Luckily, there are three additional incentives for first-time buyers in Canada.
First-Time Home Buyers’ Incentive
The First-Time Home Buyers’ Incentive took effect in 2019. 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.
To get a good idea of what budget you’re working with, calculate your maximum purchase price with this calculator.
It’s important to note that while the government offers these supports towards 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 for a mortgage.
More on the incentive from CMHC/the Government of Canada
In addition to The HBP and the CMHC incentive, the federal government offers a tax credit and a rebate.
First-Time Home Buyers’ Tax Credit
Also called the Home Buyers’ Amount, this tax credit provides a $5,000, non-refundable credit on your income tax on a qualified home purchase. The maximum available benefit is $750 in federal tax relief. In other words, it reduces your taxes owed by up to $750. Apply the whole $5,000 to your tax return, or you can share it with your spouse or common-law partner.
More on this tax credit from the Canadian Revenue Agency
GST/HST New Housing Rebate
Depending on your individual situation, you may qualify for a GST/HST rebate on the purchase price of your home.
More on this rebate from the Canadian Revenue Agency
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 there are extra options out there can help you on your journey. Government benefits, like The Home Buyers’ Plan, exist to make it a little bit easier for Canadians to realize the dream of homeownership.