Written by Penelope Graham
Monday, October 7th, 2019
The Home Buyers' Plan (HBP) has been a popular method for Canadian first-time home buyers to access the funds they need to break into the market.
Since its inception in 1992, the HBP has made it possible for qualifying buyers to withdraw funds tax-free from their Retirement Savings Plan (RSP) to put toward a home purchase or new build – an especially handy tool for those looking to purchase in a competitive market, such as Toronto or Vancouver, by having more of a down payment.
To qualify for the Home Buyers' Plan, in addition to other qualifications, you need to be considered a "first-time home buyer," meaning you haven't owned property within the last four years or haven't lived in a home owned by your spouse or common-law partner during the last four years.
The Home Buyers' Plan underwent a bit of a facelift in the March federal budget, with several new expansions introduced to the program. Here's what's changed, and how it could benefit prospective first-time homeowners.
An Increase to the Maximum
Under former HBP criteria, a total of $25,000 could be withdrawn from a buyer's RSP, to a total of $50,000 if both partners qualified as first-timers. That maximum has been extended to $35,000 each, to a total of $70,000. It's the first time in 10 years the maximum has been changed, and it went into effect immediately on March 19, 2019.
However, it's important to note that the 15-year timeline to repay the RSP funds remains unchanged. If you're considering taking out a larger withdrawal, you'll want to budget for these larger annual payments, especially when factoring how your mortgage debt obligations will impact your daily finances.
Home buyers who made an HBP withdrawal in 2019 before the change was announced can make a second withdrawal to reach the new amount of $35,000 each. The first withdrawal must have occurred between January 1, 2019 and March 19, 2019, and at least one home buyer must satisfy the first-time buyer requirements. However, any HBP withdrawals made before January 1, 2019, can't be retroactively increased under the new maximum.
Individuals Can Retain Their First-Timer Status After a Breakup
Another major change to the HBP is that individuals who've experienced a marriage breakdown – such as a separation, divorce, or split from a common-law partner – can once again be considered first-time home buyers and access the HBP to purchase or build a new home, or buy out their partner's share of the former matrimonial home if they're living separate and apart from their spouse or common-law partner as a result of the marriage breakdown.
Under the previous criteria, these individuals wouldn't have qualified as first-timers since they had lived within a home owned by their spouse, regardless of whether they had contributed to it financially. The new changes will go into effect in 2020.
It's important to keep in mind that if the borrower has a new spouse or common-law partner at the time of the withdrawal, they can't be living in a home owned by their new partner, since that would void their status as a first-time buyer for another four years.
Is the HBP Right for You?
For prospective home buyers, the HBP can be a very helpful tool to access the additional funds needed to purchase a first home. However, the plan must be viewed as a deferral of retirement savings, rather than free cash. It must be paid back to the RSP in full by the end of the 15-year timeline, which will be an ongoing financial commitment, and it also reduces the earning potential of your RSP, since pulled funds won't incur any interest or gains until they're returned.
The HBP is a popular method for a reason, though, and that's because it offers a flexible, and tax-free way to boost a home's down payment. These recent changes will give savers even greater access to funds, which will be of use in more expensive markets that require larger down payments, and will give individuals coming out of a breakup or divorce some needed financial support to move on in the market.
For more information on the Home Buyers' Plan, including eligibility info, visit the Canada Revenue Agency website.