When I bought my first home when I graduated in 2003, I was fortunate enough to have some cash saved for a down payment. Most young people, however, don’t have this luxury but they have some money in an RRSP. In this particular situation, using the RRSP First Time Home Buyers Plan (HBP) can be of great benefit.

What is the HBP?

The RRSP Home Buyers plan is a program that allows first time home buyers to withdraw up to $20,000 $25,000 (as of 2009 federal budget) from their RRSP towards their first home TAX FREE.

How does it work?

As mentioned above, if you are a first time home buyer, you can withdraw up to $25,000 out of your RRSP tax free! If you are purchasing the home with a spouse, you can both withdraw $25k EACH from your accounts. In terms of repayment, you have up to 15 years to pay back your RRSP starting the second year after the year of withdrawal (from govt website). At this time 1/15 of your borrowed amount must be paid back / year.

What’s the catch?

  • In terms of penalties, if you don’t repay 1/15 of the borrowed amount / year, you’ll have to add the amount as income.
  • You MUST be a first time home buyer and a resident of Canada at the time of withdrawal.
  • You MUST purchase/build the home before Oct 1 after the year of withdrawal.
  • RRSP contributions of up to 90 days before the withdrawal date can be used towards the HBP.

Why would I do this?

This is one of the only ways to withdraw from your RRSP tax free and a great way to get yourself into the real estate market. Some may argue that you’re missing out on growth in your RRSP while the money is borrowed. However, I think that if you get a good price for your first home relative to others in the neighborhood, the appreciation of the home will hopefully make up for this.

On top of that, aggressive RRSP contributions after purchasing the home should be part of the plan. Here is the government site that explains the HBP program in detail: Home Buyers’ Plan (HBP)

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Good post. For many first-time buyer, HBP helps push you over the 20% threshold to avoid paying CMHC insurance. In addition, every dollar pulled out of HBP saves you 5.69% in mortgage interests or equivalent to a guaranteed 9.5% pre-tax gain if you’re in the 40% tax bracket. So, I don’t miss the growth inside RRSP at all.

FJ,
I agree with you but I would just add to not take the full 15 years to put back the money into your RRSP. If not, you will definitely miss the growth inside your RRSP portfolio.

By using the HBP, it is easier to put 20% cash down and therefore not pay CMHC premium. The minimum cash down required was previously 25% but was changed in April.
http://www.thefinancialblogger.com/lower-cash-down-required-by-banks-starting-from-april/

Cheers,
FB.

FB – I would say if your rrsp is maxed out then it makes sense to pay down the HBP quicker but if you have rrsp room, then that should be used first.

I would also say if you have a large mortgage – you might want to pay down the mortgage itself with extra funds rather than the HBP. The reason for this is because the HBP payments will not change with interest rates whereas the mortgage payments will.

Mike

If your RRSP is earning more than the mortgage rate you can get, why wouldn’t you pursue a zero down mortgage and leave your RRSP money invested?

I just recently used the HBP to get in to my first home. In my situation my employer matches my contributions to the RRSP and then they are yours to keep for any purpose. Both my spouse and I worked here at the time so we both opened the RRSPs for the sole purpose of the matching and using the funds for the home purchase. We got tax breaks, matched contributions, and now we own a home. I think in this situation it was win-win all around.

Here’s what we did in 2003 when we bought our first home. In February, we took the $8400 we had saved up for down-payment and bought a money market RRSP.

After waiting the 90 days required, we withdrew the money to use towards the HBP. So we got our $8400 (+ $40 gain) back out, added the $2600 or so we got back as a tax refund on the $8400 and ended up with around $11,000 for a down-payment.

Thanks for writing this post. I’m in the process of saving up for a down payment on a condo, and the HBP is something I didn’t know much about.

I got to your site through Money Diva’s … I didn’t know so many great Canadian finance blogs were out there! Definitely putting your site on my blogroll.

Thanks again!! :)

[…] How the RRSP Home Buyers Plan (HBP) Works […]

Most banks will be happy to help you with the HBP. BMO actually had a pamphlet on how to do it. First you need at least 20K in available RRSP contribution room. Then the bank gives you an RRSP loan for 20K. You contribute it and get a tax refund for 20K*marginal tax rate (this is usually over 6K). After 90 days, you withdraw the original 20K contribution and pay off the bank loan. Your only costs are the interest on the loan for 3 months.
In essence what you are doing is immediately getting the tax refunds for 20K in future RRSP contributions.
Some people will say you lose the value of compounding – you don’t with this plan since the money was never yours.
Most people have available RRSP contribution room so that’s not an issue either.

A few points:

1) You only need $18k of RRSP contribution room — you can make a $2k overcontribution, and then withdraw the full $20k from the RRSP for the HBP.

2) Yes you avoid CMHC fees if you can go with an uninsured mortgage. This can save you literally thousands of dollars. Further, once you have a >20% mortgage you can do what’s known as the ‘Smith Manouevre’. For many, this can provide higher long-term returns than possible through RRSP investing.

3) Pay back the HBP as slow as you can, within RRSP contribution restraints. Only pay back the minimum possible under the HBP. Use the rest to make mortgage prepayments.

Mark – you don’t get any tax deferment from the $2000 overcontribution so there isn’t any value in putting it in for the purposes of taking it out again for HBP.

hi fourpillars,
agreed we get no tax benefit on the $2,000 overcontribution..but come next year..you would have a fresh RRSP limit based on your current year’s income…so you could use the $2,000 on next year’s taxes…

thanks

sam – good point.

Mike

[…] How the RRSP Home Buyers Plan (HBP) Works – Million Dollar Journey … situation, using the RRSP First Time Home Buyers Plan (HBP) can be of great benefit. … As mentioned above, if you are a first time home buyer, you can withdraw up to $20,000 out of your RRSP tax … https://milliondollarjourney.com/how-the-rrsp-home-buyers-plan-hbp-works.htm […]

[…] of yours.  The reason being is that you plan on owning a home one day, and you can use the RRSP Home Buyers Plan to help you achieve this.  Under the HBP, each spouse can put $20k towards the down payment of […]

pay off HBP , can i borrow again

rob, i think you can’t have owned a home in the past 5 years if you want to do it again. but yes, i think you can do the hbp more than once in your life as long as you meet the conditions.

who would know if i met the requirements for HBP. I plan on paying back the last 2000 on HBP from 1999 this year. The money is already in my RRSP for the buy. I was told by bank I could borrow again if the loan was pay off. Sold the first home from a break up. Do not own house ,just rent right now. I was planning to buy this year Please advise or point me in the right direction.

from CRA’s conditions for home buyers plan:
http://www.cra-arc.gc.ca/tax/individuals/topics/rrsp/hbp/conditions/menu-e.html

“You are not considered a first-time home buyer if you or your spouse or common-law partner owned a home that you occupied as your principal place of residence during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal.

You have to meet this condition at the time you withdraw an amount from your RRSPs under the HBP.”

they can check your previous years tax returns and match them up to your original HBP application with the same address on it (until you sold the home and changed your address on your tax return)

I withdrew 20,000 from my RRSP account via the HBP. I am now in the process of paying this amount back. The past two tax years, I have over contributed to my RRSP (approx 1000), thus carrying a balance to the next year. I have once again overcontributed. Can this overage be use to pay back the HBP loan?

Paying back your HBP does not come from your RRSP contribution limit so you can pay as much of it back at any time. So, yes you could apply the overages to your HBP.

Similarly (23), I have over contributed because of taking out an RRSP loan to increase my max. to $20,000 for the purposes of participating in the HBP. Can I too apply these over contributions to paying back the HBP??? Also, what is the maximum you can pay back in a given year?

Similarly (23), I have over contributed because of taking out an RRSP loan to increase my RRSP to $20,000 for the purposes of participating in the HBP. Can I too apply the resulting over contributions to paying back the HBP??? Also, what is the maximum you can pay back in a given year?

Geri; There is no maximum yearly payback amount. You could pay back the whole amount any time (though it is not recommended). You can allocate your overcontributions to paying back the HBP. The HBP allocation comes off the top, then whatever is left over would be your overcontribution (over and above the contribution limit).

However, if you overcontributed with the loan in order to do the HBP, you will be a year off. The HBP repayment doesnt’ start for another year, so you can’t allocate your overcontribution to it since you’re not in the HBP yet.

Since I’m at higher income now and i just purchased a large rrsp on a short term Heloc (to be paid off in a month when my house sells and i rent for a bit).

This way I get max tax back now and will be able to continue maxing it out next year even though my income will be lower.

My question though is should i pay the minimum owed on the hbp or pay it off with the house sold. Since im going to be at a lower rate next year, wouldn’t i be better off paying it off later than in a lower income year? Whats the advantages of carrying the balance for the full 15 yrs?

I am going to buy a new condo to be my first home. So I would qualify for the HBP Plan. It’s $20,000 no tax, no interest is very attractive. Repaying it is not much an issue. What I do not understand is that in all the examples I can read from the gov’t RRSP and HBP guide, I cannot find a situation as below:

Say, my annual deduction limit is about $10,000 and because of the repay to be done for the $20,000 over 15 year period, each year is about $1,400. So, does that mean I can contribute $10,000 + $1,400 = $11,400 each year for RRSP after the grace period of 2 years is over, or I can only contribute $10,000 and the $1,400 will be taken from the deduction limit to become the repayment amount?

I am leaning towards the former scenario because the latter does not make sense. My opinion is that if the HBP plan works in the latter case, it would mean that $1,400 will be on a 16% interest or whatever the tax bracket it is deferring my tax…

Which one is the correct case?

Yes, I think you have it right. You can contribute 11,400. But you will only see a tax refund for the 10,000 since you already got the tax break for the 1400 when you first contributed it.

When you boil it down, all the HBP is, is an interest free loan for all your future tax refunds on RRSP contributions (up to 20K). The longer you spread out the loan, the better (15 years interest free).

I agree with Nobleea, though I haven’t specifically asked the CRA that’s how I understood The HBP to work. The HBP repayment is separate from your actual RRSP contributions and should not have any effect on your contribution limit.

Conversation with the so-called RRSP expert @ CRA…

Well, it’s a matter of 15% of 20k, with potential of increase rate over the course of 15 years, so I called and ask.

The first person who gets the phone ask me to hold so she can fetch an “expert” in this matter. The expert initially said it is the latter case that applies, when I pressed for my doubts, has fetched another more senior expert, who reversed the verdict.

It gives me an impression that the cra personnel doesn’t deal with this scenario much and don’t know what they are talking about…

Hi,

My friend bought her first home and moved in on Jan 1, 2008.

She specifically asked about when she needed to withdraw the RRSP for the payment and was told any time with-in a year.

She found out in March that this was the WRONG answer and now she is going to have to pay taxes on the money she withdraw’s as she doesn’t meet the condition anymore.

She didn’t have internet and this was her first home and she had to go with the info she was provided. Is there some way she can get around this and still qualify as it wasn’t her fault? The typical call centers all say no but sometimes there ARE way that calls centers don’t like to tell you about.

Thanks!

I have a similar question to Andrew’s: If I have an RRSP contribution limit of $8,000 and have a minimum repayment towards my HBP of $1500. If I overcontribute to my RRSP by more than $2000 (eg. $5000 so I have actually contributed $13.000) and apply the full $5000 towards my HBP, will I have to pay the 1% penalty for overcontribution?

I would think not, otherwise that would mean no one could ever repay the full amount early without penalty.

Bill, as I understand it, as stated above, the HBP repayment is treated separately from your actual RRSP contributions. Both the withdrawal and the repayment do not effect your contribution limits. So this year you have 8000 in room and a 13000 contributions to your RRSP, on your 2008 tax forms you would designate the 5000 to repay your home buyer plan, and 8000 to the RRSP. You are within your contribution room and you would only see you net income (line 236) reduced by the $8000.

I recently opened an rrsp account and had no clue about $20,000 towards a house. My question is, is if i ever buy a house, it will solemnly be under my name, as my partner has $50,000+ in school debt from 10 years ago. Can he open as well an rrsp account as well and use his $20000, share with bad credit?

If your partner is a spouse or common law partner then you both can borrow 20,000 for a total of 40,000 from your respective RRSPs if either of you buy a house. If you are making spousal contributions I think there are rules as to how long the funds need to be in the RRSP before they can be withdrawn for any reason, so you may want to look in to that with an accountant or other advisor.

You can get all the details on the HBP here:
http://www.cra-arc.gc.ca/E/pub/tg/rc4135/README.html

Nicole,
You may also learn that his contribution in this manner requires he be named on the mortgage, a step you wished to avoid.

DAvid

David, I don’t believe that is correct. Source?

Traciatim,
My ‘source’ is contained in the link you provided. The rest is ‘connect the dots’.

“If you buy the qualifying home with your spouse or common-law partner, or with other individuals, each of you can withdraw up to $20,000.”

Each individual must enter into the purchase of the home to obtain the HBP eligibility. If both are named on the deed, the bank MAY demand both names on the mortgage. Since Nicole’s spouse has a financial interest in the home due to his contribution of the share of the downpayment, the bank’s diligence MAY further require his name on the mortgage. Finally, in nearly any partnership situation, the bank will want to ensure other partners are fully aware of the debt and responsibilities the other partner(s) are engaging. This is usually accomplished by including their names on the mortgage docs.

If you have other info, please share it, as I’d like to learn of it.

DAvid

DAvid, if I may add to this.

Could it be Traciatim, was asking about your comment to “a step you wish to avoid”?

In that a guy with bad credit & lots of debt ($50k worth of student debt) withdrawing $20k for an RRSP may infact not be eligible for a mortgage?

Or is the real question about the fact that the boyfriend has no RRSP’s, and no mention if he is a first or second time home owner. Possibly two things to consider including the 4-year rule, as well as if the dude would qualify?

Dont forget also the within 30-day rule about funds being withdrawn from the RRSP otherwise not eligible

JR, Here’s how I read it:

I recently opened an rrsp account and had no clue about $20,000 towards a house.
I’m new to this and didn’t realize this option was available to save for a downpayment.

My question is, is if i ever buy a house, it will solemnly be under my name, as my partner has $50,000+ in school debt from 10 years ago.
Sometime in the future, I may want to buy a house. Since my partner has this bad debt, and has not yet addressed it, I don’t want him to be affecting my mortgage eligibility, therefore I’ll apply independent of him.

Can he open as well an rrsp account as well and use his $20000, share with bad credit?

From this I made my assumption, and statement that if he is involved in the down payment, the bank may (will) want his signature on the mortgage, removing Nicole’s application independence.

I could have misread the entire thing?

DAvid

Hello,
As mentioned before, i am the only one with good credit. My common-law partner on the other hand has $50,000 + in school debt from over 10 years ago. His last resort might just be to claim bankruptcy. I am trying to perhaps have one of my family members to co-sign with me for the house and that way if he claims bankruptcy then he can start to build his credit again. So if his name has to be on the mortgage to take out $20,000 from an RRSP, then this would not be possible. Therefore, with my RRSP, i can only take out for myself with the $20,000. The other problem i had, is that i was told from my bank that if i take out a mortgage in my name only, then they can only give me a mortgage solemnly on my income and not his, and therefore i will only be able to get like a $100,000 if i am lucky! With Ottawa’s housing market will be impossible. Currently we are paying $950 in rent with no problem and after all of our bills paid at the end of the month, we have close to $2000 in disposable income. So to be paying a mortgage at $950 or more would be no problem. It is so HARD to get a mortgage! My father stated to try a mortgage broker as they may be more lenient to lend out bigger loans but could be a higher interest rate. Any other ideas???

My suggestion is to first address the $50,000 debt. A concerted effort should pay it off in less than 2.5 years, while addressing his credit report.

David

Nicole how do you both plan to get the RRSP built up to $20k each and how long it would take?

I can tgive advice, but it would seem that cleaning the debt and getting the credit rating back up, then build the RRSP to save for the house would be the logical steps … but this could take up to 5++ years for the whole plan.

In the event your partner declares bankruptcy and hopefuly whoever is after your partner cannot garnish wages, then you should know that there is a seven year hold over on the credit. In the meantime as DAvid said, start repairing the credit.

Seems you have a tough stretch, however with $2000/mth of disposable income its possible… but it will take time

Prioritise what is important to you and really figure out which of the brankruptcy or clearing the debt is right for your situation

Hmmm, that’s interesting. I never really thought that you had to both be on the deed, on that the family was buying the home. I am in a common law relationship and am solely owner of our home (Deed and Mortgage), yet both of us withdrew funds from our respective RRSPs when the offer to purchase was accepted. Neither of our financial institutions requested that both names be on the deed or mortgage.

I’ll do some more digging and if I can’t find anything I’ll call the CRA and ask and let you know what the official ruling is. If we withdrew in error I guess I will have to file a correction for last years taxes and include her withdrawal as income rather than under the HBP, but I’ll not get ahead of myself until that time comes :)

Yes, David is correct and I was not. In order to be eligible to withdraw funds from an RRSP under the home buyers plan your name (without the disabled person extras I mean) must appear on the agreement to purchase the home. Since that’s the case both people must be on the mortgage, insurance, and all other related items.

Looks like I have to readjust my spouses 2007 taxes to reflect her withdrawal as income rather than under the HBP. I’m just happy it was a small withdrawal and shouldn’t effect the total tax owed by any great amount.

My common-law husband withdrew funds from his RRSP so we could use it to buy the home we bought in July/07.

His RRSP statement from his investment co., at the end of the year, showed the sale of the mutual funds (gain from when they were bought) and a service charge of $107.00

Does he have to claim capital gains on those funds that were sold and can he claim the service charge?

Jamie, you should have received the T4RSP from the financial institution showing the income for you to fill out your forms, or software, or to give to your tax preparer. If it was not through the HBP, the withdrawal will be treated as regular income, not a capital gain.

I’m not certain on the fee, but I’m pretty sure he can not claim the service charge. You may ask a tax professional or call the CRA, contrary to popular belief they are very helpful and the wait times aren’t too long at all. In fact, that was actually one of the most pleasant calls I’ve made to any company in a while when I called to ask about the HBP above.

Traciatim,

In law, there is a Mr. Traciatim and there is a Mrs. Traciatim, but there is no Mr. & Mrs. Traciatim. This follows through to issues such as your tax return, which does not allow you to submit a combined return, but rather requires a joint return. It also means you are not responsible for her speeding tickets…….

Thanks for sharing the info you gathered.

DAvid

Thanks for your response, Traciatim,

He did receive a T4RSP for the amount of the HBP.

I have called CRA about the service charge and they are calling me back.

I have called CRA on other issues and they have been terrific. The last time I left a msg, they called me back the next day.