How the RRSP Home Buyers Plan (HBP) Works
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)