How the Home Buyers Plan (HBP) works!
If you are in the market to purchase a home, your down payment can come from your RRSP’s. You must be a First Time Homebuyer or haven’t owned a home in 4 years, to be eligible to withdraw up to $35,000 from your RRSP’s tax free.
If you are purchasing with someone who has never owned a home, you both can withdraw up to $35,000 tax free. That could be $70,000 in total between both applicants. However, since the HBP is considered a loan, it must be paid back in installments over 15 years.
• RRSP funds you borrow tax free from your RRSP’s must be in your account for at least 90 days prior to your withdrawal date.
• You cannot have owned a home within the previous 4 years
• If you are purchasing a home with a spouse or common law partner who is not a First Time Homebuyer, you cannot have lived in the house they owned for 4 years.
• You must intend to live in the home within one year of purchasing it as a primary residence.
• If you have used the Homebuyers Plan before, you cannot have a balance owing.
• You must be a Canadian resident.
How the HBP process works
It’s important to note, that any funds being withdrawn under the HBP must be in your RSP account for 90 days before you can withdraw it.
In order to participate in the Home Buyers Plan, you must print off Form T1036 from the Canada Revenue Agency’s website (www.cra.gc.ca). You must complete section 1 and then send the form to the financial institution that holds your RSP’s so they can complete section 2. Your financial institution will give you a T4RSP form which confirms exactly how much you have withdrawn from your RSP’s under the Home Buyers Plan (HBP).
Repaying the loan
Since the HBP is considered a loan, you must repay the amount you withdrew from your RRSP’s within 15 years, with the first payment due two years after you withdrew the money. The CRA will send you a Notice of Assessment which shall indicate the amount of the loan you have repaid, and the amount of your next payment.
If the HBP payment is missed, that portion of the loan loses its tax-exempt status and is considered to be regular, taxable income.
• Down payment possibilities: With the required 5% minimum down payment needed to purchase a home in Canada, the HBP gives buyers access to additional funds in order to meet these requirements.
• Tax free funds: Because the funds tap’s into your RRSP dollars, buyers get a tax break when they put funds into their RSP’s. However, all annual payments need to be met in order to keep this tax-exempt.
• Retirement put at risk: While the HBP is meant to restore retirement funds in the long run, the ones rests on the homebuyer to repay them. Failing to repay them leaves the homeowners less in the bank when it comes to retirement time and more dependent on their home’s equity to fund their retired years.
• Lost Interest Building Opportunity: Pulling RSP’s out for your down payment effectively cuts short their interest earning capabilities. Pulling the funds for your down payment benefit you short term, untouched savings will earn far more interest over the long haul.
• Young savers are not using RRSPS: According to Statistics Canada, over 40% of income earners younger than 35 save their money in a tax-free savings account (TFSA).
When looking to purchase a home and wanting your down payment to come from the Home Buyers Plan (HBP), make sure you work with a mortgage professional who can explain exactly how accessing your funds works and how payments back to your RRSP’s has to happen. Consult your Edmonton mortgage specialist Eva Neufeld today!