The RRSP First Time Home Buyer Plan is a great way to put a down payment on your first home. If you’ve been diligently saving in your RRSP, you can now use this cash as a loan to yourself to buy a house.
The First Time Home Buyer Plan is different than the First Time Home Buyer Incentive, which is a program where the Government of Canada provides up to 10% towards a down payment. You can learn everything you need to know about the First Time Home Buyer Incentive here.
Home ownership is still a cornerstone of the financial plan of most Canadians. However, with the average house price in Canada nearly $500,000, it’s not always easy to get a foothold in the real estate market. One of the ways the Government of Canada has made home ownership more accessible is through the RRSP First Time Home Buyer Plan.
What is the RRSP First Time Home Buyer Plan?
The RRSP First Time Home Buyer Plan (HBP) lets you withdraw up to $35,000 from your RRSP without penalty for a down-payment on your first home. If you’re buying a home with your partner, they are also eligible to withdraw up to $35,000 from their RRSP. This gives you $70,000 altogether for a down-payment on your home.
The First Time Home Buyer RRSP is an awesome way to unlock funds you have in your retirement. Normally, a withdrawal from your RRSP would be subject to income taxes. However, under the HBP, you’re withdrawing the money as a tax-free loan to yourself.
What is an RRSP?
The Registered Retirement Savings Plan (RRSP) is a tax-advantaged saving or investment account for your retirement. Your individual contribution room is proportional to your taxable income. It works out to be approximately 18% of your gross income earned.
Unlike the Tax-Free Savings Account (TFSA), money in your RRSP is simply tax-deferred, not tax-free. This means you won’t pay taxes on it the years you make your contributions. But your withdrawals from your RRSP in retirement will be subject to income tax at that time.
How long do you have to pay back the First Time Home Buyer RRSP?
You will be required to repay the amount you withdrew from your RRSP under the First-Time Home Buyer Plan over 15 years. This begins two calendar years after you’ve purchased your house.
If you withdrew the full $35,000 under the HBP, your repayment amount will be $194 per month ($2,333 per year). You can and should continue to contribute more to your RRSP on top of your HBP repayments. These will be counted as new RRSP contributions.
You don’t have to do anything special when you put money into your RRSP throughout the year. When you file your income taxes, you will indicate how much of your RRSP contributions for that year are repayments to the First Time Home Buyer RRSP and how much are new contributions.
First Time Home Buyer RRSP withdrawal
This is an obvious point but I want to emphasize it anyway. You need to actually have $35,000 in your RRSP if you want to withdraw $35,000 for a downpayment on a house. To save this amount, you’d need to set aside approximately $580 per month for 5 years.
It’s easier to save money in your RRSP than you might think. Because this is a tax-advantaged account designed to let you contribute pre-tax income to your retirement savings, doing so can really give you a break when you file your income taxes.
If your income is greater than $50,000, it can make sense to make contributions to your RRSP and claim these contributions when you file your taxes. This will usually result in an income tax refund, which you can further use to top up your RRSP.
How to use the First Time Home Buyer RRSP
Most people know about the RRSP First Time Home Buyer Plan and why it’s a great idea, but when it comes to actually withdrawing the funds to buy their first home, they worry they might be missing a step.
Step 1: Make sure you’re eligible for the HBP
The most important part of using the Home Buyer’s Plan is being eligible to use it. You don’t want to purchase a home then learn $35,000 of your down payment is inaccessible to you!
Review the HBP eligibility criteria before you count on your RRSP to fund part of your down payment. You’ll be asked to confirm you eligibility again in Step 5 when you fill out the HBP RRSP withdrawal request form from the CRA.
Step 2: Convert any investment securities to cash
You’ll need to show proof of down payment to your mortgage broker or lender before you go house shopping. They’ll ask for the past 3 months of account statements from your RRSP to verify that you have the funds available.
You must have the money in your RRSP for 90 days or longer if you want to use it for your down payment.
If the money in your RRSP is invested in the stock market, you’re certainly welcome to keep it in there until the eleventh hour, but I don’t recommend it. You should sell off your investments and have the amount of money you want to use for your down payment in cash before you go house shopping. This protects your down payment from market volatility, as well as any delays waiting for trades to settle when you need to withdraw your down payment.
Step 3: Purchase your new home
While you might be eager to get your down payment all in one place before you buy a house, you actually can’t withdraw from your RRSP under the First Time Home Buyer Plan until you’ve purchased your home!
Step 4: Make a request at your bank or brokerage that you will be withdrawing from your RRSP
If you simply withdraw $35,000 from your RRSP, it will be subject to withholding tax unless you tell your bank or brokerage you are making the withdrawal under the First Time Home Buyer Plan. Your bank or brokerage will have a form you need to fill out with the amount your withdrawing, the day you need it, and the form of payment you want the withdrawal to come through as.
You’ll need to have your down payment available in full 2 weeks before the possession date of your new home. This can make the timeline of withdrawing from your RRSP extremely tight. I recommend selecting wire transfer or electronic funds transfer to withdraw your RRSP under the First Time Home Buyer Plan. If you choose these methods, you will also need to submit a void cheque with the bank information of where you want the funds deposited.
Including processing time, your money will be deposited into your account in 1-2 business days for wire transfer, or 5-10 business days for electronic funds transfer. It’s eons faster than waiting for a cheque to be mailed to you.
I withdrew part of my down payment from my RRSP with Questrade. Their form is available here.
Step 5: Fill out the t1036 Home Buyers’ Plan (HBP) Request To Withdraw Funds From an RRSP form for the CRA
In addition to telling your financial institution your RRSP withdrawal is under the Home Buyer Plan, you’re going to need to tell the CRA too.
You can download the CRA First Time Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP form here. This document will be submitted to your bank or brokerage where you keep your RRSP. Your financial institution will use it to communicate to the CRA that you are making a withdrawal under the HBP.
Step 6: Make sure to include the HBP withdrawal when you file your income taxes the following year.
When you file your income taxes, there is a checkbox that asks plainly if you made a withdrawal from your RRSP under the First Time Home Buyer’s Plan. It’s important for you to select “yes”. This is necessary to track and allocate your future RRSP contributions as HBP repayments going forward beginning the following year.
RRSP First Time Home Buyer disadvantages
The RRSP First Time Home Buyer Plan is an awesome tool if you use it correctly, but most people don’t. Research shows that as many as one-half of Canadians don’t stick to the HBP repayment schedule. They’ve fallen behind on payments or stopped paying altogether.
The consequences of not repaying your RRSP First Time Home Buyer loan on time are serious. You lose that RRSP contribution room forever and you need to pay income taxes on the amount you failed to repay.
The reasons people are not able to make the repayments on their HBP are predictable. Most of them boil down to home buyers seriously underestimating the costs of homeownership. Many people are so focused on scraping together that downpayment, they forget the other costs of homeownership.
Having a home also means having property taxes, higher utility bills, and home maintenance costs. If you don’t factor these expenses into your monthly and annual budgets, you will find yourself short on cash, and one of the things likely to suffer is your savings.
From a purely mathematical standpoint, saving up your house down-payment in your RRSP is better than saving it in your TFSA.
It’s always better to spend tax-deferred money and let tax-free money continue to grow. However, if the repayment schedule of the HBP is going to cause you financial stress, you might want to think twice about withdrawing from your RRSP to fund your house downpayment!