RRSP Home Buyer's Plan
The RRSP Home Buyer's Plan (HBP) is a federally instituted government program that allows you to withdraw up to $25,000 from your RRSPs to buy or build a 'qualifying home’ (as a first time home buyer) or for someone who is related to you and is disabled. You may still be able to be considered a first time home buyer if you own a rental property (which you have never occupied) or you have not recently owned a home. Only the individual who is entitled to receive payments from the RRSP can withdraw funds from an RRSP. The only restriction is for locked-in RRSPs that you are unable to withdraw funds from.
You must repay all withdrawals from your RRSPs within a period of no more than 15 years. Generally, you will have to repay an amount to your RRSPs each year until you have repaid the entire amount you withdrew. If you do not repay the amount due for a year, it will be included in your income for that year.
Qualifying Home - For the purposes of the Home Buyer's Plan, a qualifying home is a housing unit located in Canada. This includes existing homes and those being constructed. Single-family homes, semi-detached homes, townhomes, mobile homes, condominium units and apartments in duplexes, triplexes, fourplexes or apartment buildings, all qualify. A share in a co-operative housing corporation that entitles you to possess, and gives you an equity interest in, a housing unit located in Canada also qualifies. However, a share that only provides you with a right to tenancy in the housing unit does not qualify.
Locked-in RRSPs - In most cases, you will not be able to withdraw funds from a locked-in RRSP. ‘Locked-in’ refers to the restrictions and limitations that are imposed by the Pension Benefit Act for each province and territory. The locked-in RRSP is designed to preserve pension assets for your retirement. Money put into your locked-in RRSP is usually the transfer value of pension benefits you have built up in your former employer's pension plan, which you ask to be moved when you terminate employment or plan membership. If you are unsure if your RRSPs are locked in, contact your issuer.
Benefits - The utilization of your RRSPs within the guidelines of the HBP result in benefits that are realized immediately and extend over the long-term:
- Increased down payment
- Decreased principal balance on the mortgage oweing
- Avoidance of substantial interest costs that accrue over long periods
Establishing an RRSP with borrowed funds - The "HBP" permits an individual to establish an RRSP with borrowed funds and then use the resultant tax refund for a down payment. After a 90-day period, the RRSP may be collapsed to repay the loan. You will then receive a tax refund that can be applied to the purchase of a home. These funds are considered an acceptable form of payment provided the refund is received at the time of closing and the lender can verify that the borrower has proven liquid assets equal to a minimum equity of 5% of the purchase price.
Managing Tax Refunds - The government does not monitor the funds that are withdrawn from RRSPs for the purposes of the HBP. Therefore, provided that an individual has qualified as a first time home buyer and has purchased a qualifying home, they may do whatever they desire with the funds, including:
- Clearing the balance on credit cards
- Reducing or paying out personal loans
- Making lump sum payments on a mortgage
- Purchasing household necessities — appliances, furniture, accessories, etc.
- Increasing the down payment to reduce/avoid default insurance premiums
- Paying for legal fees and/or tax adjustments
The more debt you are able to pay off, the fewer monthly expense obligations you will have. This will ultimately put you in a much better financial position.