Using The First Time Home Buyer’s Plan For A Home Down Payment

What Is The First Time Home Buyer’s Plan?

If you are planning on buying or building your first home and you want to use money from your Registered Retirement Savings Plan (RRSP) to use for your down payment and other house expenses, instead of making a regular withdrawal and facing the tax consequences, you can take advantage of the First Time Home Buyer’s Plan (HBP).  When you take advantage of the HBP, what you are essentially doing is borrowing money from yourself that will eventually need to be paid back into your RRSP.

Who is eligible?

In order to be eligible, you must enter into a written agreement to buy or build a home.  The home must be your principal place of residence, and you must be a Canadian resident.  The most you can withdraw is $25,000, and you can either withdraw it all at once, or you can make a series of withdrawals throughout the same year.   If you plan on buying a house with your spouse, your spouse can also take advantage of the HBP.

Do I have to pay it back?

Once you have withdrawn money under the HBP, you have two years of grace and then you have 15 years to pay back the money you borrowed from your RRSP.  It is best to start paying it back immediately rather than waiting for the grace period to end.  If your cash flow is tight, however, at least try to pay back 1/15^th of the money every year in order to avoid having to pay taxes on the money borrowed.  The sooner you pay back the HBP money, the sooner you can take advantage of the tax benefit of contributing to an RRSP again.

What if I haven’t started saving for a home down payment yet?  Should I save within my RRSP?

If you have yet to start saving for a home down payment, rather than saving within an RRSP, another option could be to tuck away money from every pay cheque and put it into a Tax Free Savings Account (TFSA).  By doing so, you wouldn’t have to consider the tax implications and go through the hassle of the HBP when you pull the money out to use for your down payment. Nevertheless, if your income tax bracket is high and you find after doing some number crunching that it is still more beneficial to take advantage of the tax break, then the HBP is still the way to go. The key is to make sure to pay it back ASAP.  If you are not prepared to do so, then the TFSA is definitely the way to go.

For more detailed information on the Home Buyer’s Plan and how to take advantage of it, click on this link.