Guest Post By: Penelope Graham, Zoocasa
For today’s aspiring first-time home buyer – and especially those looking to purchase homes for sale in one of Canada’s hottest housing markets – drumming up the funds for a down payment can be incredibly challenging. Thanks to record low interest rates, the rate of return on savings is generally low, while skyrocketing home prices have rapidly outstripped earnings.
While some buyers are lucky enough to receive a boost in the form of parental cash – aka the “Bank of Mom and Dad” – many more scrimp for years to pull together the minimum 5 – 7 percent required to enter the market. Savvy retirement savers, however, have another option.
The Home Buyers’ Plan (HBP), a federal program designed to help first-time buyers break into the real estate market, allows those who qualify to access up to $25,000 in saved RRSP funds, tax-free, to put toward their down payment. In instances where two first-time buyers are purchasing together, such as spouses, each can respectively contribute, up to a total of $50,000.
However, tapping into those hard-saved retirement funds come with some strict obligations, and not every buyer qualifies. Here’s what prospective home purchasers should know about using the HBP.
How to Qualify for the HBP
- While the HBP is marketed toward first-time buyers, the main criteria is that the applicant cannot have owned property within the last four years, or, if purchasing with a spouse, have dwelled in a home that their significant other has owned. If only one partner is considered a first-time buyer, and has never lived in a home owned by their spouse, they can still qualify to access up top $25,000 under the HBP, but their spouse would be exempt.
- Applicants must be Canadian citizens or residents and have formally entered into an Agreement of Purchase and Sale (APS) to purchase or build a home.
- The homeowner must intend to dwell in the home for at least one year after purchasing or building it.
- The funds must be held within an RRSP account for a minimum of 90 days before they can be withdrawn tax-free.
- The withdrawal must occur within 30 days of obtaining ownership of the home
- The closing of the home purchase transaction must occur before October 1 the year of, or following the transaction. For example, if the home is bought in November of 2018, the transaction must close before the first of October 2019 to be eligible.
How to Access Funds for the HBP
To tap into their RRSP funds, home buyers must request to do so by presenting a T1036 form to the financial institution that houses their retirement investments. This typically occurs as soon as the APS is finalized, as buyers must coordinate the payment of their savings with the funds provided by their mortgage by the closing date. However, the money can only be taken from investments that allow it to be liquid – if it’s tied up in a fund with a set term that can’t be accessed prematurely, it cannot be used for the HBP.
Once the financial institution agrees to release the funds, the home buyer will receive a T4RSP form, which they’ll need to reference when they fill out their income taxes for the year the home was purchased.
Paying Back your RRSPs
Did raiding your RRSPs tax-free seem too good to be true? In what can be a nasty tax shock to some buyers, any funds used for the HBP must be paid back within 15 years or will be taxed as personal income. Home buyers must start to pay back a minimum of one-fifteenth annually, starting a year after their home purchase. However, unlike a mortgage or other amortized loans, HBP funds can be paid back in full without penalty at any time over that 15-year timeframe. If the minimum annual payment isn’t made, it will be considered personal income for that tax year.
Does Using the HBP Make Sense?
The largest downside to raiding your RRSPs is losing out on 15 years’ worth of compounded interest unless the funds are immediately paid back. While one could argue that this can be offset by any appreciation in the home’s value, it’s important to take this lost opportunity cost into account when determining if tapping into your RRSP for the HBP is the right move for you.
Penelope Graham is Managing Editor at Zoocasa, a leading real estate company that combines online search tools and a full-service brokerage to empower Canadians to buy or sell their homes faster, easier and more successfully. Home buyers can browse real estate listings for condos, townhomes and houses for sale across Canada, on the website or the free iOS app.