The Home Buyer's Plan (HBP): Borrow from yourself to help with home ownership

The Home Buyer’s Plan (or HBP for short) was introduced by the Canadian government to assist first time home buyers with owning their first homes. It is actually a provision that allows you to take a zero-interest loan from your own RRSP for up to $20,000 that must be repaid over 15 years and without causing that RRSP withdrawal to incur any income taxes. (If you remember, if you make a withdrawal from your RRSP, those funds are normally included as income in the year of withdrawal – the HBP is one of a few exceptions to this rule.)

housepicture.jpgOne common misconception is that the funds need to be used towards the down payment. Actually, there is no requirement that the funds be used towards your home purchase in any way at all! If you wanted to take advantage of the program to pay for a cruise around the world, you are completely entitled to do so… but that may not make much financial sense… :)

There are some conditions that you must meet in order to qualify for the program, and of course there are a lot of rules to be cognizant about in order to avoid any nasty tax surprises. Let’s explore the ins and out of the program in a little more detail:

Qualifying for the HBP

You can qualify to be eligible for a withdrawal under the HBP through a few different methods – the most commonly used approach is to qualify as a "first time home buyer". Strictly speaking, this means that you must not have occupied a home as a principal residence at any time from January 1st of the 4th calendar year before the year of withdrawal and up to 31 days before the date of the withdrawal in the current year. In other words, it is possible to qualify as a first time home buyer more than once – so the name is a *bit* misleading. Also note that if you have had a relationship with someone who owned their own home, and you were living with that person (whether you contributed to the mortgage or not), this could restart your clock on your eligibility as a first time home buyer. The eligibility as a first time home buyer is specific to the individual – so it is also possible that within a couple, only one person could qualify as a first time home buyer.

There are three exceptions to the condition of being a first time home buyer:

1. If you are a disabled person and you are acquiring a more accessible home.

2. If you are acquiring a more accessible home for someone who is disabled and will be living with you, and that person is related to you by blood, marriage, common-law partnership or by adoption.

3. If you are PROVIDING funds to a disabled person related to you as above, to assist them in acquiring their own more accessible home that you will NOT live in.

If you have satisfied the above conditions, you must additionally:

1. Be a resident of Canada

2. Have entered into a written agreement to buy or build a home

3. Buy or build your home before October 1st of the year AFTER the year of withdrawal

4. Intend to occupy the home no later than 1 year after buying said home (although if you do not actually move in by this time – i.e. delay in construction of a new home or condo – then so long as you had intended to be moved in by this time, you are okay) 

5. Make all withdrawals under the program within one calendar year (which includes January of the following year) so long as the last withdrawal is not more than 30 days after the closing date. (You can withdraw all the money you intend to withdraw in one lump sum, or you can make multiple withdrawals. You have to fill in a special form, a T1036, for each withdrawal and submit this with each withdrawal request to your RRSP plan provider.)

6. Have a current Home Buyer’s Plan balance of $0 (this is important for those who are trying to use the program a second time – it basically means you must have made all the repayments to any previous HBP withdrawals before participating again).

Repayments

I hope you didn’t forget that this is a loan to yourself – which means you have to pay back the funds you have borrowed from yourself! I mentioned in the beginning of this post that the loan is a zero-interest loan – but keep in mind that while those funds are NOT in your RRSP, they are NOT generating growth of your retirement savings – one of the reasons many people are not big fans of this program. However, the goal of home-ownership is a strong one and can be more of a priority than retirement planning – especially when you are younger. You should consult a financial advisor to determine the tradeoffs of using the HBP – many have found that they are better off not using it. Others find that it may be the onlyl way to get into their first house. It all depends on your specific situation.

Nonetheless, the HBP program requires that you repay your RRSP over 15 years, starting in the second year after the year of withdrawal. So basically that means you won’t have to make any repayments in the year you make the withdrawal OR the following year either. In addition, since the repayment is technically due at the time you file your taxes – it can be around 3 years before you actually have to start making payments back to your RRSP.

The amount of the repayment will be 1/15 of the balance as a minimum in the first year of repayments. If you fail to make this minimum payment, then you will be forced to include the shortfall in your income for that tax year (and hence pay tax on that shortfall).

Let’s look at an example: Let’s say that you make a withdrawal of $20,000 from your RRSP under the HBP in February of 2007. You won’t have to start making your repayments until 2009 – which means the payment is actually due by the first 60 days of 2010 to qualify as an RRSP contribution for the 2009 tax year. Since you took out the maximum of $20,000, you will have to repay 1/15th of $20,000 for the 2009 tax year which works out to $1,333.33. If you only pay $1,000 back to your RRSP and claim that as your HBP repayment for the year, then you are short by $333.33 and that will be included as taxable income on your tax return.

If you choose to make a repayment that is larger than the minimum required, this will reduce the amount of annual repayments in the future. For example, let’s say you made a $5,000 repayment in the first year. In this case, you will be required to pay 1/14th of the remaining balance in Year 2 of the repayments which works out to $1,071.43.

In case you were wondering, any repayments made to your RRSP are not tax deductible since you are just repaying money that you had already contributed to your RRSP (and hence, had already deducted from your income).

Final Notes

There are many people who contribute to an RRSP when they are younger solely for the purpose of using the HBP since any contribution made will also be generating tax refunds. This would allow for the ability to accelerate the savings of one’s first down payment. However, it is important to note that any RRSP contribution made must remain in your RRSP for 90 days in order for you to be able to deduct those contributions. Without the ability to deduct the contributions, you will not generate any tax refunds!

As always, I recommend consulting with your own financial advisor to see if this program is something that fits with your own financial plans.

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Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 11 comments
  • Traciatim

    I used this strategy recently to buy my home. My employer match to my RRSP is instantly vested and they match 100% of up to 6% of my salary. This means I was putting 12% of my salary away just to buy a house, when I was taking tax deductions the whole time.

    So say for instance my salary was 60000 and I lived in Ontario. (neither are true. . .)

    I would take 6% of my salary, or 3600 a year, and my employer would match that as well. My tax bill on the total 60K would be about $13272. By putting the 3600 in the RRSP it would save me 1121 in taxes. This puts me 3600 + 3600 + 1121 = $8321 closer to the down payment and closing costs. Plus you add in any investment gains, even though they were little as I had a very short time frame.

    Also, a thing to remember is both you and a spouse can make a withdrawal for this purpose. This could get you up to 40K to get yourself in the door to home ownership. If both people had a similar RRSP plan as I do, think how quickly that 40K can be reached.

    Many people are against borrowing from an RRSP to buy a home, but I think this is a near perfect way to get your foot in the door. Even without the company matching I still think it makes sense to do; Even if only for the extra tax savings helping get to the goal faster.

  • Preet

    Thanks so much for the comment – I was actually going to write about a few strategies concerning the HBP after writing this primer post. Your strategy was one of the strategies I am going to write about.

    There is another strategy I am going to write which details why you may want to never pay back the HBP… you may find it of interest. Might not be for you – but I’m sure you’ll find it interesting.

    Stay tuned! And thanks for your contributions to the site! :)

  • CanadianInvestor

    Useful post, well explained.
    Though the interest-free loan is not earning the RRSP any interest, it is invested in the house, which gains in value over the years tax-free as a principal residence. Plus, it avoids the need to borrow money on the mortgage, and avoids the interest thereupon, which is not tax deductible. Unless my logic is wrong, the loan is in effect a way of converting non-deductible mortgage interest into tax-free interest, not in tangible terms but in opportunity cost terms.

    Post suggestion: Maybe you should also write about using your RRSP to make a real mortgage loan to yourself.

  • Preet

    Thank you for your comment Jean – you are very correct – the trade off of lost growth is offset by the growth in the house.

    For your post suggestion – do you mean holding your own mortgage inside your RRSP? I have covered that recently here: Click Here

  • Buy my home

    >”Buy or build your home before October 1st of the year AFTER the year of withdrawal” – I guess it’s a bit late for me now, huh? or was it oct 2009? :)

  • firsttimebuyer

    Very useful article. Thanks so much! I do have a question about the 90-day ‘hold’ period, however. I am currently in a group RRSP through my work. If I change places of employment and transfer the money from my current RRSP to a new RRSP through my local bank, does the money I transferred have to remain in the new RRSP for 90 days prior to withdrawing it? or can I take advantage of the HBP right away?

    Thank you so much.

  • Preet

    @firsttimebuyer – You would be fine so long as the “contribution” was made 90 days prior to the withdrawal under the HBP program. The clock does not “reset”. Hope that helps, but as always I recommend you get final confirmation through your institution for your own particular situation… :)

  • Adrian

    Hi Preet – I wonder if you can help me answer a question about re-payments following Home Buyer Plan RRSP withdrawal.

    If I have previously maxed out all my RRSP contribution room and my RRSP contribution limit based on my previous years earnings is say $5000. Will I still be able to contribute $5000 (deductible from my income) plus the 1/15th (or perhaps more) to go against the repayment (non-deductible)?

    I have searched the web for this answer but to no avail.

    Thanks

  • susan

    Hi – I have a few questions on the HBP that I have not been able to get answers to:
    1. Can I pay it all off before the 15 years?
    2. Do I have to file taxes in order to pay it off or can I inform the government that it was paid through another means?
    3. What happens if I never pay it off?
    Thx

  • homebuyer

    I’m a bit confused about qualifying as a first time home buyer. My husband withdrew funds from his RRSP in July 2007 to purchase our first home. My name was also on the home. When would we both qualify to use the HBP again or at least myself qualify? July 2011 or July 2012? I’m a bit confused when you say “you must not have occupied a home as a principal residence at any time from January 1st of the 4th calendar year before the year of withdrawal and up to 31 days before the date of the withdrawal in the current year. “

  • homebuyer

    Oh, I should also mention that he has already paid back the full amount of his RRSP withdrawl.