What comes to mind when most people think of a Registered Retirement Savings Plan (RRSP) is a tax-advantaged investment account that holds stocks, bonds, GICs, and other assets, with the intention of growing wealth over time to fund one’s retirement.
An RRSP can be used for more than retirement planning, however. First introduced in 1992 by the federal government, the RRSP Homebuyers’ Plan (HBP) was implemented with the goal of helping first-time homebuyers gain access to the housing market. The plan allows those who qualify to borrow up to $35,000 from their RRSP to help purchase a home.
Under regular circumstances, withdrawals from an RRSP would be treated as taxable income, but withdrawals designated as part of the HBP program are not taxed, as long as the money is returned to the RRSP account in the future.
Home can be prohibitively expensive, making it a challenge for aspiring homebuyers to save for a down payment. The HBP may be a great option to help alleviate some of the financial stress.
Advantages of the HBP
Using your RRSP’s as a source for your down payment can be beneficial. You’ll have the ability to draw from your own resources and possibly have enough to put toward the down payment that you won’t be required to pay mortgage default insurance.
If you have existing funds saved up already these can be used to purchase furniture, pay for closing costs, or invested elsewhere. Using the funds in your RRSP to finance your down payment can give you more options with the money you already have on hand.
Also, if you’ve found the ideal house at the right price, you may be better off purchasing it right away, before it’s sold to another buyer. If you don’t have the required funds for a down payment you may lose the opportunity, which is why it would be more prudent to access the cash already in your RRSP.
How does the HBP work?
You can use the HBP provided that you qualify as a “first-time homebuyer”. As long as neither you nor your partner owned a home during the four calendar years before opting into the HBP program, you meet the criteria. Because of this rule, it’s actually possible to qualify as a first-time homebuyer multiple times in your life.
In addition to qualifying as a first-time homebuyer, the funds you’ll be withdrawing must be on deposit in the RRSP account for at least 90 days.
As mentioned already, the maximum withdrawal permitted under the program is $35,000. Because the amount you withdraw is technically a loan from your RRSP account, you must pay this sum back. The HBP rules state that you have 15 years to repay the full amount back to your RRSP plan. This repayment period begins the second calendar year after you make your withdrawal.
Although the plan allows for 15 years to repay the full amount, you’re expected to make a minimum payment each (1/15th the withdrawal amount) year. If you’re unable the pay back the minimum amount, it will be added to your income and you’ll be taxed on it. Some financial institutions offer automatic repayment programs to ensure you don’t miss any repayments, so be sure to use them to your advantage.
The minimum repayment amount does not have to be put back into the original RRSP account you withdrew the original funds from – you can choose a different account.
Each year, the Canada Revenue Agency (CRA) will send you an HBP statement of account, which will show you the amount you’ve repaid, your outstanding balance, and the amount you’re required to contribute for the following year to your RRSP or other designated account.
How to get started
To withdraw funds from your RRSP under the HBP, you’ll need to fill out form T1036 (Homebuyer’s Plan Request to Withdraw), which is available on the CRA website. Make sure to read the eligibility rules and other details, so you understand the program thoroughly.
When the time comes to begin repaying your withdrawal, you’ll have to fill out and send to the CRA an Income Tax and Benefit Return every year, until the entire balance is paid back. The form to fill out is Schedule 7, RRSP and PRPP Unused Contributions, Transfers, and HBP of LP Activities.
Things to consider
It’s critical to examine in detail the pros and cons of participating in the HBP. You should ask yourself the following questions:
- Is withdrawing cash out of your RRSP the optimal choice from a financial perspective at this time (this depends on the type of investments you hold in your RRSP account and the rate of return they’re generating)?
- Is this the best time to withdraw funds to purchase a home? What is the state of the housing market and the broader economy?
- Is it worthwhile to forego the tax-the sheltered growth of your RRSP account in order to save on your mortgage costs?
- Will you have the funds available each year to repay the minimum amount?
Depending on your financial situation, it might be your best option to withdraw from your RRSP to help finance your down payment. As always, crunch some numbers before opting into the program to make sure it’s the right decision for you.
