What first-timers should know about changes to the Home Buyers’ Plan

Thinking of breaking into the Canadian housing market for the first time? Chances are, you’re doing your research and looking into every possible tax break and incentive available to help financially ease your transition into home ownership.

One of the most heavily-utilized programs offered via the federal government is the Home Buyers’ Plan, which allows first-time buyers to pull funds set aside for retirement in an RRSP to put toward their home down payment. It’s one of very few instances that RRSP funds can be accessed without any tax complications.

In order to be eligible for the Home Buyers’ Program, a home buyer must:

• Have not owned property in Canada within the last four years

• Have the funds sheltered within an RRSP vehicle for a minimum of 90 days

• Pay the withdrawn funds back into the RRSP within a 15-year timeline, which starts in the next calendar year following the withdrawal. A minimum of one-fifteenth of the total amount must be paid annually; if no payment is made, that portion of funds is then earmarked as income for that year and taxed in full by the government.

In a sense, the HBP is a method of borrowing from your retirement in order to fund your home purchase – one of the great benefits of tapping into RRSP funds is that due to their tax-free status, borrowers are able to save a larger nest egg faster than trying to utilize more traditional routes, such as savings accounts. As well, RRSPs can be invested, allowing the principal to earn returns and interest, further fueling down payment funds.

However, there were some new developments for the HBP announced in the latest federal budget, designed to make the program even more accessible for Canadians. Here’s what prospective home buyers should know.

A $10K increase to the withdrawal maximum

Perhaps the largest change made to the HBP, which took effect immediately on March 19, 2019, is an expansion to its maximum withdrawal amount: individual home buyers can now take out up to $35,000 of their saved retirement funds, from the previous limit of $25,000. If two individuals purchasing a home together both qualify as first-time buyers, they can each withdraw up to $35,000, to a combined total of $70,000. Housing critics have lauded this change, saying the expanded amount will be of more realistic help in Canada’s priciest markets, such as Vancouver and Toronto houses for sale. 

For buyers who made a withdrawal prior to March of this year, the expansion is also temporarily retroactive; these buyers can make another withdrawal, to a total combined $35,000, if the first was made within January 1 – March 19. However, any withdrawals made prior to January cannot be expanded under the new rules.

Home buyers should note that though the maximum amount they can access is growing, the 15-year timeline to pay it back isn’t – it’s important to be aware of how this can contribute to a larger annual carrying cost of home ownership, in addition to mortgage payments, property taxes, and utilities. 

Newly single? You may still qualify as a first-timer

Under the previous iteration of the HBP, what officially classified a buyer as a “first-timer” was somewhat limited. In addition to not being able to own property within the last four years, a qualifying buyer could also not dwell within a home owned by a spouse or common-law partner over the same timeframe.

The federal government has stated this will change as of 2020, specifying that those coming out of a divorce, legal separation, or split with a common-law spouse may be able to retain their first-timer status, and tap into the HBP to either purchase a new home, or buy the matrimonial home out from their former partner.

In order to do so, they’ll need to satisfy the following:

• The applicant must have dwelled apart from their former partner for at least 90 days when the withdrawal is made, and the separation must have occurred within the last four years.
• If the applicant has a new spouse or common law partner, their new partner cannot own and occupy a principal place of residence.
• If the applicant still owns and lives in the former matrimonial home when they make the withdrawal, they must either have acquired their interest or right from their former partner no earlier than 30 days before the withdrawal is made (and no later than September 30 of the following year).
• If the applicant still owns and lives in the former matrimonial home when they make the withdrawal, and they don’t intend to use the funds to purchase the property out from their former spouse, they must sell or dispose of their interest in the home no later than the end of the second calendar year of the withdrawal.

Should you use the HBP?

With these new measures in place, more Canadians will be able to leverage their retirement savings to break into the market – but there are some caveats they should keep in mind. One is that the funds must be saved in the first place – an increase to the maximum doesn’t help much if the cash isn’t on hand.

The largest, however, is the opportunity cost of removing retirement funds from a tax-sheltered, income earning investment vehicle. While the HBP funds must be paid back over the 15-year time frame, the funds will have lost out on years of being exposed to the market and income generation. 

As well, as mentioned above, paying back the HBP funds can result in a significant annual carrying cost for new home buyers who may be adjusting to making their initial mortgage payments, as well as other associated home ownership costs – especially those who’ve maxed out their withdrawals. 

It’s a good idea to discuss with a financial advisor or coach whether using the HBP is the best strategy for you, rather than alternative savings vehicles such as TFSAs, which are also tax sheltered, and have no payback requirements.

Penelope Graham is the managing editor at Zoocasa, a full-service brokerage that offers advanced online search tools to empower Canadians with the data and expertise they need to make more successful real estate decisions. View MLS listings at zoocasa.com or download our free iOS app.