How Does the Home Buyers' Plan Work in Canada?

Buying your first home in Canada is a huge financial commitment, with the average first-time homebuyer in Ontario putting down around $140,000. As a first-time homebuyer, you have a few options regarding where you can expect to get that money. You could save it yourself, you could ask family for a gift (as do 30% of first-time homebuyers) or you could make use of the several government programs available in Canada to help first-time homebuyers get on the property ladder. One popular government program is the Home Buyer’s Plan, which lets you use your RRSP to boost your down payment savings. Here’s everything you need to know about the Home Buyer’s Plan.

What is the Home Buyers' Plan (HBP)?

For both first-time buyers and those who have done it before, purchasing a new home can be a daunting task. Exploring different areas, understanding the market, visiting locations, and negotiating with sellers can all be time-consuming and frustrating. Above all, acquiring the funds for a new home can be especially difficult and straining.

Luckily, for residents of Canada, there is a way of alleviating some of this financial burden through enrollment in the Home Buyer’s Plan. This federal program allows first-time buyers and other eligible couples and individuals to borrow up to $35,000 from their RRSP to use for their down payment on a new residence. Here’s how it works.

How to participate in the Home Buyers' Plan (HBP)

Enrollment in the Home Buyer’s Plan begins by determining whether you meet the criteria to do so. The HBP is only available to certain types of buyers and through specific financial outlets, so it’s important to take a look at your own unique set of circumstances first.

Investing in a Registered Retirement Savings Plan

The primary means of acquiring an HBP loan is through withdrawal from a Registered Retirement Savings Plan. An RRSP is a retirement savings account which incurs a number of tax benefits—namely, the ability to deduct RRSP contributions from total income, reducing tax burdens.

The HBP allows eligible individuals to withdraw up to $35,000 from their RRSP to make a down payment on a home. The money withdrawn from the RRSP accrues no interest but must be repaid in full within a 15-year period which begins two years after withdrawal. Payments are annual and evenly apportioned from the total amount of the loan. Any sum not repaid each year is considered income by the CRA and is taxable.

Who is eligible for the HBP

Eligibility for the HBP depends on a variety of factors, but the primary requirement is that you have to be a first-time homebuyer. The federal government sets out very specific rules about who is considered a first-time homebuyer. To qualify, you have to meet the following criteria:

• You cannot have owned a home in the past four years

• If you are buying a house with a spouse, you can’t have lived in a house they owned for over 4 years

• You must intend to make the home your primary residence within one year of purchase

• You can’t have an outstanding balance if you’ve used the Home Buyers’ Plan before.

• You must be a Canadian resident

Using the HBP When Buying with a Spouse (or Common Law Partner)

If you are buying a home with a spouse or common-law partner who also meets the criteria of a first-time homebuyer, both of you can apply for the HBP separately, and withdraw $35,000 each, for a combined maximum of $70,000.

If your spouse or partner has already purchased a home and doesn’t qualify, they won’t qualify for the HBP. In this instance, as long as you have lived with your spouse for less than four years, you’ll still qualify for the HBP.

How to Withdraw Money from Your RRSP Under the HBP

If you meet the criteria for a first-time homebuyer and you’ve decided that using the program is the right choice for your home buying process, here are some additional requirements to keep in mind before you start the withdrawal process.

• RRSP funds must be in your account for at least 90 days to be eligible for withdrawal

• You must have entered into a written agreement (for example, an accepted purchase agreement) to buy or build a qualifying home.

• You must make the withdrawal from your RRSP within 30 days of taking title of the home

If you believe you fulfil all the criteria to participate in the HBP, you can begin taking steps to withdraw the necessary funds from your RRSP.

Your first step is to complete a T¹⁰³⁶ form, known as a “Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP.” In area 1, you’ll answer basic questions about your ownership history and other qualifying factors. Then submit the form to your RRSP provider. Your provider will complete the rest of the form and begin processing your request.

Generally, you won’t hear from your provider whether your request is approved, you’ll simply log into your online banking account one day to find the money in the appropriate account.

HBP is a Loan from Yourself

When you use the HBP, you are borrowing money from your retirement account to use as a downpayment. As a result, you are expected to pay back your withdrawal over a period of 15 years, starting two years after your initial withdrawal. You can pay the HBP back at its minimum rate of 1/15th your withdrawal per year, or you can pay it back more quickly.

To repay the HBP, just contribute money to your RRSP. Then at tax time you’ll be asked by your tax filing software whether you would like to designate a portion of your RRSP contributions to repay the HBP. If you are required to make repayments and you don’t, that portion is considered taxable income for that tax year.

Situations Where You Might Still be Eligible

The Home Buyers’ Plan is meant to help as many people as possible afford a new home. As such, there are a variety of situations where you may be eligible for participation in the plan despite not meeting the criteria laid out above. Before you decide not to participate in the HBP program, examine the special conditions below to see if you might still qualify.

Past the Buying or Building Deadline

If you are using the HBP to fund a new home build, your new home must be completed by the first day of October of the year after you use the program. This can lead to problems if you experience significant delays in the build of your home. In this case, you’ll need to prove that you spent the entirety of the HBP funds on materials or contracting services. 

If you don’t meet the October 1st deadline, the money you withdrew may become taxable income.

Breakdown of a Marriage or Common-Law Partnership

If you’re a first-time homebuyer who was previously excluded from HBP criteria because you lived with your spouse in their owned property for more than four years, you may still be able to participate in the program if your relationship status changes. If you live separate and apart from your spouse or common-law partner for at least 90 days, you are now eligible for the HBP.

That said, if your new principal residence is a home owned by your new spouse, you won’t be eligible for the HBP.

Other restrictions apply for those eligible for the HBP under these unique circumstances but who retain some partial ownership of their previous residence with their estranged partner. Within two years of receiving funds, this former residence must be either sold or otherwise disposed of by the HBP recipient at the end of the relationship. An exception is made in the case that the recipient purchases this residence in its entirety.

How to Participate in the HBP if You Aren’t a First-Time Homebuyer

In addition to these unique circumstances, there are also exceptions made in the case of disabled individuals.

You are allowed to apply for the HBP without being a first-time buyer if you are a disabled person yourself, are a relative buying or building a home for a disabled person, or are helping a related disabled person buy or build a home. In all these cases, the four-year ownership clause is waived, and criteria for this new residence are fairly relaxed. It is only stipulated that the home must better cater to the special needs of the disabled person than their current living situation does.

For the HBP, persons are considered disabled if they receive the disability amount from the Canadian government or can obtain a certified T²²⁰¹ form from a medical practitioner.

Should You Use the HBP?

The HBP is a good way to boost your down payment, which will ultimately make your mortgage more affordable, or help you increase your maximum purchase price. In fact, depending on the size of your existing down payment, using the HBP could dramatically increase your maximum mortgage affordability.

For example, let’s say you have an income of $80,000, and your partner earns $65,000. You have saved $25,000 for a down payment on your first home, and your partner has saved $15,000. In this case, your maximum affordability would be $650,000 at an interest rate of 2.09%. But if both you and your partner are able to withdraw an additional $35,000 each from the HBP, that increases your down payment to $110,000.

This higher down payment increases your maximum affordability from $650,000 to $780,000. In some cities in Vancouver, that is the difference between a tiny starter condo and a townhome you can grow your family in.

Overall, we think the HBP is an excellent program for any first-time homebuyer who is looking to increase the size of their down payment. The HBP is accessible to the average Canadian, and the application process is not onerous. Most homes will qualify under the program, and as long as you remember to pay back your contributions at a rate of at least 1/15th per year, the HBP can be a valuable, tax-free way to boost your home down payment.