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That’s where the Federal Government’s First Time Home Buyers Plan (FTHBP) comes into play. This program allows you to withdraw money from your Registered Retirement Savings Plans (RRSP) tax-free to purchase your first home.
The withdrawn money must be paid back to your RRSP account within 15 years.
This guide provides you with all the information you need to know about the first-time homebuyer plan program.
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The Home Buyer Plan is a program instituted by the federal government for eligible Canadians to borrow up to $35,000.00 of their RRSP savings ($70,000.00 for a couple) to finance the down payment on their first home.
The money needs to be in your RRSP account for a minimum of 90 days to qualify for withdrawal under this incentive program. And you must have a signed agreement to buy or build a qualifying home.
A qualifying home for this program is an existing or a newly built house in Canada. The house can be a single-family, semi-detached, townhouse, mobile, condo, or apartment in a duplex, triplex, or fourplex.
The exciting part is that this withdrawal is not taxable as long as you repay it within the 15-year window. The required payback amount each year would be one-fifteen of the borrowed amount.
For example, if you withdrew $35,000.00 from your RRSP account. You must pay back at least $2,333.33 every year to your RRSP account.
1/15 * $35,000.00 = $2,333.33
Unfortunately, you can’t use money from HBP to buy a rental, second home, or vacation property.
The house must be your principal residence or a related person with a disability. In addition, the home must be occupied within one year of the purchase or construction.
You need to complete and submit Form T1036 to your financial institution or brokerage managing your RRSP investment to withdraw from your RRSP for this program.
Form T1036 notifies your financial institution or the brokerage house of your intention to use the money to buy your first home under the HBP. Also, you need to state how much you want to withdraw from your RRSP for this program.
You can make multiple withdrawals under the Home Buyer’s Plan in the same year, provided you do not exceed the withdrawal limits of $35,000 for an individual or $70,000 for a couple.
The required payback period of the withdrawn money is 15 years. The first year of your house ownership is your grace period. You are only required to begin repaying this money from year two.
The entire balance becomes due anytime you sell the house or stop living in it full-time.
Unless you are considered a person with a disability or helping a related person with a disability to buy or build an owner-occupied property, you must be a first-time homebuyer to withdraw money from your RRSP for house buying.
You are considered a first-time homebuyer if you, your spouse, or your common-law partner have not owned a house in the past four years. Also, you can still benefit from this plan if you are a person with a disability or helping a family member with a disability to buy or build a home.
There are many tax benefits to investing in RRSP. The benefits are in place to incentivize you to save for your retirement. For example, the income earned in your RRSP is not taxed until you withdraw it.
These tax exemptions are incentives to save for your retirement. HBP allows you to withdraw money from this retirement savings account to buy your first home before reaching the retirement agent without being penalized.
Money from your RRSP account can undoubtedly boost your house-buying power.
If your dream home is priced at $750,000.00, with a good credit score, good credit history, and verifiable income, you need a minimum down payment of $50,000.00 to buy this house. The $35,000.00 from your RRSP under the FTHP will help you generate the required down payment. With that $35,000.00, you only need $15,000.00 to buy this house.
Note that these values do not include closing costs.
Even if you have enough money from your other sources to put down for the house, you can still use the money from your RRSP to reduce your total mortgage loan and probably default insurance premium. The higher the loan amount, the higher your interest expense and your default insurance premium. Lowering these costs with the tax-free money of your RRSP using your HBP is better.
A mortgage default premium is required when buying a house with less than a 20% down payment.
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Before you can take advantage of the HBP, there are several hurdles you must cross.
To be eligible for this program, you must meet all of these conditions:
Yes, you can, although the process can be somewhat complicated. You need to obtain an RRSP loan from your bank or financial institution to take advantage of this.
After 90 days, you can withdraw the money from your RRSP under the HBP to finance the purchase of your first home.
In this scenario, you’ll have two loans to pay – the RRSP loan from the financial institution and the money withdrawn under the HBP. So it is essential to do the math to determine if it is worthwhile to use the RRSP loan route to buy your first home.
On a positive note, you will still receive a tax receipt for the RRSP contribution, which you can use to offset your taxes in the following year.
No, you cannot use the HBP to buy another property if you currently have a property registered in your name. You can still be eligible for this after four years from when the title of your current home is transferred. In addition, you must have paid off any outstanding HBP loan.