Financial Tools for First Time Home Buyers – A Deep Dive into the Home Buyer’s Plan
Getting into the housing market can be intimidating.
Not only is a home one of the biggest purchases most Canadians will make in their life, but home prices seem to be spiraling out of control.
The average home price in Canada this past February (2022) was nearly $640,00 – over $800,000 if you include Vancouver and Toronto.
That means, for your first home you’ll need at least $39,000 to cover your down payment – that is 5% of the first $500,000 and 10% of any portion above that up to $1 million.
That’s nearly two-thirds of the average annual income in Canada.
It’s no wonder that many first-time homebuyers need a little help.
The good news is there’s help out there.
New tools announced in the 2022 federal budget
The Federal Government is proposing to spend $10.14 billion on housing over the next five years to try to make homeownership more attainable for more Canadians. These include a variety of plans, from savings accounts to tax incentives.
- Creating a Tax-Free First Home Savings Account (TFFHSA) – This account allows first-time homebuyers to save $8,000 per year to a maximum of $40,000 per person that can be used to purchase a home. If buying as a couple, or household, each individual can create their own TFFHSA. Contributions to this account would be tax-deductible. Withdrawals and income generated within it would be non-taxable.
- Doubling the First-Time Homebuyers’ Tax Credit – The tax credit for first-time homebuyers would double from $5,000 to $10,000, retroactive to Jan. 1, 2022.
- Extending the First-Time Home Buyer Incentive – The First-Time Home Buyer Incentive is a shared-equity mortgage with the Government of Canada. Through this, buyers receive 5% or 10% investment from the government for their newly constructed home, which must be repaid after 25 years, or when the house is sold. This incentive, which was previously set to expire, will be extended to March 31, 2025.
Furthermore, the government is pledging to accelerate zoning and construction to increase supply and decrease home prices.
The Home Buyer’s Plan
Thirty years ago, in 1992, the Canadian government introduced the Home Buyer’s Plan (HBP) to help Canadians get into the housing market for the first time.
The HBP allows first-time homebuyers to borrow money from their RRSP (Registered Retirement Savings Plan) to help with the downpayment to buy or build a new home.
With this plan, homebuyers can withdraw up to $35,000 from their RRSPs without any of the penalties or taxes usually associated with removing funds from an RRSP early.
After purchase, homeowners can take up to 15 years to replace the money they borrowed from their RRSP.
THE BENEFITS OF THE HBP
There are many benefits of using the HBP, including:
- You can leverage your RRSP for more than just retirement
- It can help you come up with a down payment for your home
- The money you withdraw is not counted as income, therefore it’s not taxed
- If you’re buying a house with your spouse, you can both make use of the HBP
MORE ON THE DETAILS
If both partners in a relationship qualify for The Home Buyer’s Plan, each can pull up to $35,000 from RRSPs in their name – that’s a total of $70,000 to put towards a first home.
It’s important to keep in mind that there are also time limits on the money you can withdraw and when you can use it.
- All RRSP contributions made within 90 days of the purchase of your house are ineligible for withdrawal.
- Any money withdrawn from your RRSP needs to be spent on your home within 30 days of closing/taking ownership of your home.
WHO IS ELIGIBLE FOR THE HOME BUYER’S PLAN?
To qualify for the HBP, there are a few requirements:
- You must be considered a first-time homebuyer, which means that you cannot have owned a home in the last four years
- You must be a Canadian citizen or permanent resident
- The home that you are purchasing or building must be located in Canada
- You must intend to live in the home as your principal residence
This makes the HBP perfect for young families who need some help to cover a downpayment on their first home.
HOW TO GET THE HBP
There are three simple steps to withdrawing money from your RRSP:
- Fill out area 1 on Form T1036, Home Buyers' Plan (HBP) Request to Withdraw Funds from an RRSP – which you can get online or from your RRSP issuer/Financial Advisor
- Once you’ve filled out your portion of the form, give it to your RRSP issuer (or Financial Advisor) so they can fill out area 2
- Receive your money
REPAYING THE HOME BUYER’S PLAN
Whatever you end up pulling from your RRSP under the HBP, each dollar needs to be repaid within 15 years. It’s easiest to think of the HBP as a loan, albeit without interest (as long as it’s paid back within those 15 years)
While there is some leeway within the repayment plan, the government does have a baseline plan.
- The first payments must begin in the second year of homeownership
- Each payment should be equal, i.e. 1/15 of the total amount
Just like any loan, it is possible to increase your payments and pay it off earlier. It’s also important to note that your repayments do not affect your annual contribution room in your RRSP.
HOW TO REPAY THE HBP
Once you’ve pulled money out of your RRSP under the HBP, the CRA will send you an annual account statement with the total amount owing and the minimum payment due. This information is also available on your Notice of Assessment and on your CRA MyAccount.
You should be mindful when repaying the HBP to make sure your payments are designated as HBP payments and not new RRSP contributions.
To do this you’ll have to report the payment on Schedule 7 and submit this along with your T-1 General Income Tax Return. This will ensure that the government knows they are HBP repayments, which means they will not count towards your RRSP contribution limit.
If you don’t do this, you may end up defaulting on your HBP, or overcontributing to your RRSP.
ACCESS THE HBP EASIER WITH BAYVIEW FINANCIAL
Accessing and properly repaying the Home Buyer’s Plan can be confusing. If you want help to make sure you fully understand how the HBP works, and ask whether it’s in your best interest, please give us a call. We’ll walk you through your options and ensure you take all the necessary steps to do it right.