Using an RRSP to Buy a Home
Everything you need to know about the Home Buyers’ Plan.
By Emily Southey | 8 minute read
Wondering whether you can use your Registered Retirement Savings Plan (RRSP) to buy a new home? We cover all there is to know about the Home Buyers’ Plan below, including the pros and cons of using your RRSP to buy a home.
Understanding the Home Buyers’ Plan
The Home Buyers’ Plan (HBP) is a federal assistance program designed to help Canadians purchase their first homes. It is distinct from other government incentives available to homebuyers as it allows buyers to withdraw funds from their RRSPs to buy or build qualifying homes. Under the HBP, first-time homebuyers can withdraw up to $35,000 from their RRSPs (entirely tax-free if the amount withdrawn is paid back on time) for the purposes of buying a qualifying home. Buyers then have 15 years to pay back the withdrawn funds.
Home Buyers’ Plan eligibility requirements
As with all government assistance programs, the Home Buyers’ Plan has a unique set of eligibility requirements. To be eligible for the HBP, buyers must meet the following criteria:
- The RRSP funds you borrow must have been in your account for a minimum of 90 days before withdrawal;
- You cannot have owned a home in the last four years;
- If you’re buying a home with a spouse or common-law partner who is not a first-time homebuyer, you cannot have lived in a house that they owned for more than four years;
- You must have entered into a written agreement to buy or build a qualifying home;
- You must plan to live in the home you purchase within one year of buying it and it must be your principal residence;
- You must be a repeat buyer who is buying or building a home for a relative with a disability;
- You must have a written agreement to buy or build a home for yourself or a relative with a disability;
- If you have used the Home Buyers’ Plan before, you cannot have any outstanding balance due;
- You must withdraw the money from your RRSP within 30 days of taking title of the property; and
- You must be a resident of Canada.
How does the Home Buyers’ Plan work?
Now that you know whether you are eligible for the HBP, let’s dive into how it works. If you are eligible and would like to take advantage of it, you must first apply. The application is called the “Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP” form, or T1036. You are responsible for filling out Area 1, while your financial institution must fill out Area 2. If you are approved for the HBP, your financial institution or another RRSP provider will deposit the funds into a bank account of your choosing and send you a T4RSP slip (this slip confirms how much you withdrew from your RRSP and when, and will be necessary for your tax return).
As mentioned, homebuyers can choose to withdraw up to $35,000 from their RRSP accounts, meaning couples might be able to withdraw a combined total of $70,000. This amount can be withdrawn without paying any taxes. The funds being withdrawn must have been in your RRSP account for no less than 90 days and they must be deposited in another account no more than 30 days after taking the title of your new property. All withdrawals under the Home Buyers’ Plan must be made within one calendar year.
“Homebuyers can choose to withdraw up to $35,000 from their RRSP accounts, meaning couples might be able to withdraw a combined total of $70,000. This amount can be withdrawn without paying any taxes.”
Paying back Registered Retirement Savings Plan funds used for the Home Buyers’ Plan
You withdrew up to $35,000 from your RRSP under the HBP, allowing you to buy your dream home. Now comes the less fun part: paying it back. HBP participants are required to repay the full amount they withdrew from their RRSP within 15 years. Calculating the minimum annual repayment instalments is relatively simple. You just have to divide the length of time you have to pay the loan back (15 years) by the amount you withdrew.
For example, if you chose to withdraw the maximum allowable amount of $35,000, your minimum annual repayment instalments would be $2,333 ($35,000 divided by 15 years). The first payment is due exactly two years from the date you made the withdrawal. More specifically, payments must be deposited back into your RRSP account before the annual RRSP deadline. RRSP deadlines may vary but are typically around March 1st. The CRA sends all Home Buyers’ Plan participants an HBP account statement in their notice of assessment to simplify the process. The statement details the amount you’ve already paid back and how much is still outstanding.
Please note that HBP participants are welcome to pay back more than the minimum annual payment, should they choose to do so. Doing so will reduce your overall annual payments. It’s also worth noting that HBP repayments do not count toward your annual RRSP deduction limits. However, in the event that a homebuyer is unable to pay back the minimum required amount in the years following the RRSP withdrawal, the difference becomes RRSP income for that year, for which you will be taxed by the Canada Revenue Agency (CRA).
The Pros and Cons of Using Registered Retirement Savings Plan to Buy Homes in Canada
Using your Registered Retirement Savings Plan funds to buy a home in Canada has both pros and cons. To help you determine whether participating in the Home Buyers’ Plan is right for you, consider the list below.
- The Home Buyers’ Plan functions as an interest-free loan. The HBP allows homebuyers to withdraw money tax-free, which means it essentially works like an interest-free loan (assuming you repay your funds on time). This is a major pro, as most loans come with interest fees.
- Withdrawing money from your RRSP under the Home Buyers’ Plan can significantly increase your down payment. Taking advantage of the HBP allows you to increase your down payment by up to $35,000 (or $70,000 for couples). This might make it easier and less expensive to obtain a mortgage and buy your first home.
- The Home Buyers’ Plan may not be helpful without existing RRSP savings. If your RRSP doesn’t already have much money in it (for example, several thousand dollars), the Home Buyers’ Plan might not be very useful to you.
- If you can’t afford to stick to the repayment schedule, it can be expensive. As part of the Home Buyers’ Plan, you agree to repay the loan according to an annual repayment schedule. If you are unable to afford the minimum annual repayments, your RRSP withdrawals will be taxed by the CRA.
Questions to Ask Before Using RRSP to Buy a Home
If you still aren’t sure whether using your RRSP to buy a home is the right decision after reading the pros and cons list above, try asking yourself the following questions:
- Is it the right time to cash out your RRSP? Consider whether withdrawing funds from your RRSP at this time is a wise decision (that is, what are your current RRSP investments and the rate of return you are getting on them?).
- How much can I afford for a down payment without the Home Buyers’ Plan? If you can only afford a very small down payment of 5%, withdrawing RRSP funds might be worthwhile if it means getting a lower mortgage rate. It might even be the difference between being able to afford a home or not. You must consider whether increasing your down payment and reducing your mortgage amount is worth giving up the future tax-sheltered growth potential of your RRSP.
- Can you afford to repay the minimum required amount each year? Remember that the minimum required amount is the amount of money you withdrew (usually $35,000 but it may be less) divided by the length of the loan (15 years).
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Frequently Asked Questions
Is it a good idea to use RRSP funds to buy a house?
Using RRSP funds to buy a house may be a wise financial decision for many Canadians. Doing so can significantly increase your down payment, which is likely to make you eligible for a better mortgage rate. For some, using RRSP funds to buy a house might be the only way that they can afford to purchase a home. Purchasing real estate is often one of the best investments people make. If you aren’t sure whether it’s a good idea to use your RRSP to buy a house, consider speaking with a mortgage broker or financial planner.
Can you pull RRSP funds to buy a house?
If you are eligible for the Home Buyers’ Plan, you can pull funds from your RRSP to buy a house. Only first-time homebuyers and repeat buyers who are purchasing a property on behalf of a relative with a disability are eligible for the Home Buyers’ Plan in Canada.
Can I use my RRSP to buy a house a second time?
Yes, it is possible to use your RRSP to buy a house a second time but only if your previous HBP balance has been paid in full. Four years must also have passed since you sold your last home to be eligible for the HBP a second time.
Can I use my RRSP to make a down payment on a house?
Yes, you can use the money you withdraw from your RRSP under the HBP for a down payment. In fact, putting the money toward a down payment is a popular decision, as making a larger down payment has lots of benefits, such as a lower mortgage rate. Please note that if you are buying your first home with another person, like your spouse or common-law partner, you may each be eligible to withdraw a maximum of $35,000, equalling a total of $70,000 you can put toward a down payment.
How long do you have to pay back RRSP funds after buying a house?
Homebuyers have 15 years to pay back the funds they withdrew from their RRSP after buying a house. HBP participants are required to make annual repayments for the duration of the loan. However, if you can pay more than the minimum annual repayment amount, you might be able to pay back the loan in less than 15 years.
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