Owning a home is a financial goal for many Canadians, but it can be hard to save up enough money given homes’ current prices. But, using things like the first-time Home Buyer’s Plan (HBP) and your Registered Retirement Savings Plan (RRSP) can effectively help you reach that savings goal sooner.

What are your options when saving for a home?

At this stage in my life, homeownership is an expected milestone among my peers. I’ve even seen several social media friends posing with a sold sign in front of their new digs. I’m not in the market personally, but my boyfriend is, so I know first-hand the stress and anxiety you may be feeling about finding the perfect home at the right price. If this is you and homeownership is something you’re exploring, I feel it’s important to know your financial options. 

The most obvious thing you should do when you’re starting to save for a home is to calculate how much you’ll need for a down payment. If you plan to buy in the next three to five years, a high-interest savings account is a safe place to store your savings. Next, you’ll need to calculate how much of a home you can afford. There are some great online mortgage calculators to help with this, such as RateHub or LowestRates. From there, it’s time to consider closing costs and the additional increase in expenses you may face as a first-time homebuyer.

If you’re not sure you can save up enough by the time you want to buy, another option is the first-time Home Buyer’s Plan. You may have heard of an RRSP when it comes to saving for retirement, but have you heard of the RRSP Home Buyer’s Plan? Today we will discuss how your RRSP can be a feature to help young Canadians with the rising costs of homeownership. First, let’s talk about the RRSP.

What is a Registered Retirement Savings Plan (RRSP)?

The Registered Retirement Savings Plan (RRSP) was created for Canadians in the 1950s. Since then, it continues to incentivize saving now for later through how it treats taxes. When you do your taxes, the government will require you to share how much you contributed to your RRSP that year. You may have been pleasantly surprised to see any RRSP contributions are then deducted from your taxable income. In other words, in the government’s eyes, you made less money that year and didn’t have to pay as much tax. 

The money in your RRSP then grows up until you retire, to a maximum of age 71, when you need to withdraw the savings. This can either be in a lump-sum or converted into a different account called a Registered Retirement Income Fund (RRIF), where you begin taking scheduled withdrawal payments. The money is taxed when you take it out; however, the point is that most people are in a lower tax bracket at retirement and are better off for it. 

Now that we know our RRSP basics, how can this account help you pay for your first home? Let’s learn about the HBP.

What is the Home Buyer’s Plan (HBP)?

In 1992, the Home Buyer’s Plan (HBP) was temporarily born and later turned into a permanent program given the Canadian real estate market prices. The HBP allows RRSP contributors to withdraw money from their accounts to help them with buying a home. 

Like I mentioned previously, RRSP contributions are tax-deductible; however, you pay tax when you withdraw the funds. What makes the HBP unique is that eligible withdrawals are tax-free. Although you have to pay the money back eventually, you’re essentially taking out a tax-free, interest-free loan.

This may sound pretty cool, but let’s go into the details a bit more. 

To be eligible to use the HBP, you have to be a Canadian purchasing property in Canada, and you can’t have owned a home in the last four years. This doesn’t necessarily have to be your first property purchase, as you can be eligible to use the HBP more than once in your lifetime. 

The funds you can take out are not unlimited and are capped at $35,000 per person. If you’re buying a property with your partner, then they too can withdraw $35,000, up to a combined total of $70,000. If you withdraw too much, the excess amount will be treated as a regular RRSP withdrawal. 

Buying a home is a stressful time, and you’ll want to secure your finances before finalizing any deals. That’s why you’re able to withdraw the money beforehand, as long as you buy or build a home by October 1st of the following year. 

It’s better to withdraw in advance, as you only have 30 days after the closing date to claim your eligible withdrawals. “Homes” can include detached and semi-detached houses, duplexes and triplexes, condos, and apartments. 

If you are interested in the HBP, eligible RRSP contributions had to have been made three months beforehand, meaning that there has to be a little planning involved. All money withdrawn from your RRSP for the HBP has to be returned within a minimum of 15 years. In this case, you can consider this down payment a loan from your future self. 

Although it’s good to understand all of the options available to you in your homeownership journey, the Home Buyer’s Plan may not be for everyone. Understanding the pros and cons and how they may affect your unique situation is essential before making a financial decision. 

Is the Home Buyer’s Plan (HBP) right for you?

Although it sounds great on paper, the HBP isn’t a good idea for everyone. Let’s run through a few situations where you may be considering the HBP to help with a down payment.

Scenario 1: By using the HBP, I would be withdrawing all of the money from my RRSP

If, after using the HBP, you have nothing saved for retirement, you’re putting your future self in a risky position. Do you have a pension plan set up with your employer? How much is in the plan? With an employer-sponsored pension plan, you at least have another untapped outlet for retirement savings. Any time with money not in the stock market means you miss out on years of earning potential. 

Do you have money saved in a TFSA? Or, are you using all of your available funds to buy a home? If the latter is true, I would suggest holding off entirely until you’re in a better financial position. Remember, the earlier you start saving for retirement, the better. Your home may appreciate, but that equity isn’t available to you unless you sell. This is what the term “house poor” refers to, and so many Canadians today are in this exact position. Make sure that you’re not sacrificing your future retirement goals by only focusing on today.  

Scenario 2: By using the HBP, I would still have money saved for retirement

Say you have additional money saved in your RRSP or your TFSA, or you have an employer-sponsored pension plan. With that extra retirement cushion in place, we can start talking seriously about whether the HBP is a good fit for you. 

The main benefit to using the HBP is avoiding paying for Canada Mortgage and Housing Corporation (CMHC) insurance. CMHC insurance protects lenders in the case that you don’t make your mortgage payments. You must get CMHC insurance if you buy a home with a down payment of less than 20%. CMHC insurance will be an added cost to your monthly mortgage payments. If you’re able to put down enough to make that 20% cut-off using the HBP, that’s a great reason to use it. 

If, however, you already have enough, there may be different benefits or drawbacks to you. On the one hand, you’re reducing the interest you’ll pay on your mortgage, but on the other, you’ll lose out on the interest you could’ve gained had you left the money in investments within your RRSP. 

With mortgage rates being so low right now, this is worth considering. 

Choosing whether you use the HBP is a decision every future homeowner should make on their own or with a professional. It’s certainly not “free money,” as you have to pay it back eventually, but it can help with homeownership’s rising costs and to avoid additional costs from insurance. 

It’s important to know that fixed assets or property can’t and shouldn’t be used to replace your liquid assets or investments. If you choose to use the HBP, make sure you’re prioritizing your RRSP repayment plan and saving effectively for retirement.