RRSP, HBP and Mortgages: 7 things you need to know. Numbers 4 and 5 will be very useful.

You’ve heard about the Home Buyers’ Plan (HBP) for a house purchase and you are wondering whether or not it’s worth it.  You don’t even have RRSPs, but your brother-in-law keeps telling you that it’s worth it.  You want to believe him, but you aren’t sure that it would be good for you.  Here is everything you need to know about the Home Buyers’ Plan, also known as HBP.

 

1. Who benefits from the HBP?

Is the HBP beneficial to everyone? No, but almost.  The HBP helps people who pay taxes.  So, if your salary is high enough that taxes are taken off every paycheck, it may be useful for you.  If that’s your case, you should keep reading.

 

2. What is the HBP for buying a house?

It’s a program that helps Canadians become homeowners.  It is the right to use your RRSPs as a down payment when buying a property.  By the way, even if you don’t currently have RRSPs this program can be very interesting for you.  I will explain why a little later but for now, here are the advantages of the HBP.

 

3. The benefits of using the HBP as a down payment

There are several advantages to using the Home Buyers’ Plan (HBP).  For a simple explanation, I would say it is advantageous because it inflates your down payment or allows you to receive a large tax refund the following year.  I like to use the following as examples, here are 2 examples.

Lise is planning on buying a property in a year or 2 and would like to save for a down payment

Is it advantageous for Lise to use the HBP? Yes!

What I would recommend for my friend Lise is to place her money in an RRSP.  Let’s say that in the first year she has $10,000 which she places in an RRSP.  When it comes time to file her taxes, she will have a nice tax refund.  It’s hard to estimate what the amount would be, but the average salary for a Quebecer is $45,000/year, so she could hope to receive approximately $3,000.

Lise would then have an extra $3,000 for a down payment.

4. The HBP to increase your down payment

In Lise’s case, it was advantageous to use the HBP because it allowed her to increase her down payment.  Having a large down payment is interesting for 2 reasons.  First, you pay less interest on the mortgage.

Second, you pay less in CMHC mortgage insurance.  In fact, as of October 2016, the cost of the CMHC fees with 5% of the property’s value in down payment is 3.6% of the borrowed amount.  If you give 10% in down payment, the cost of the fees drops to 2.4%, 15% down payment the fees drop to 1.8%

Here is a chart that explains the savings obtained on the CMHC fees when you have a 10% down payment instead of 5%.

On a purchase of $200,000, you will pay $2,520 less in CMHC fees if you have a 10% down payment instead of 5%.

Therefore, there is an advantage to having the biggest possible down payment when buying a property.  As we saw with Lise, the Home Buyers’ Plan can specifically be used for this.

5. The HBP without RRSPs

John has $10,000 in an account but $0 in RRSPs, he wants to buy a property soon

Is it advantageous for John to use the HBP? Yes!

What I would tell John is to place his $10,000 into an RRSP.  After 90 days that amount can be withdrawn and used as a down payment for the purchase of a condo or a house.   The following year, when filing his tax return, our friend John will have a nice little surprise with his tax return, a great big cheque.  On an RRSP investment of $20,000, John can expect to receive a tax refund of $2,000 to $4,000, assuming his income is between $30,000 and $100,000.

In the end, John will have managed to buy his property and next year he will receive a nice big tax refund!

 

Donald doesn’t have a penny in the bank and he wants to buy a house soon

Can the HBP be useful for Donald? Possibly!

The HBP can even be useful for quickly building a down payment.

6. The eligibility criteria for the Home Buyers’ Plan

You must not have owned your main residence in the last 5 years

First side note here, I am referring to your main residence. So, if you own a cottage or even an investment property but you are a tenant of your main residence, you are still eligible

Second side note, you do not need to be a first-time homebuyer.  If you have owned property in the past but it has been more than 5 years you are once again eligible.  However, you must have fully reimbursed your first HBP.

You must not have lived with someone, in a conjugal manner, who owned their main residence in the last 5 years

Conjugal means spouse in the eyes of the government.  Therefore, if you were common-law with someone that owned their main residence in their last 5 years but you have changed your address and are no longer considered common-law partner, then you are eligible for HBP.

You must be a Canadian resident

Can be applied to a condo, a house, an investment property…as long as it becomes your main residence.  In other words, the place where you will reside.

 

7. The HBP rules for buying a house

  • You can use up to $35,000 of your RRSPs as a down payment. For a couple, it’s $35,000 per person, up to a maximum of $70,000. On the other hand, if one partner has $50,000 in RRSPs and the other $0, you can only take $35,000 per person, therefore it would only be $35,000.
  • Your money must be placed in an RRSP at least 90 days before the transaction.
  • Your money can be withdrawn up to 30 days after the transaction with the notary.
  • After you use your money, you will have to pay back your RRSP. You will have to pay back all the money used for the HBP. You will have 15 years to repay this money at a rate of 1/15 per year. For example, if you used $15,000 of your RRSPs as a down payment, you will have to repay $1,000 per year in your RRSPs, or 15,000/15 = 1000.
  • You can start repaying this money 2 years after buying your property.
  • Generally, it is advisable to only pay back the minimum of 1/15 per year because it’s not particularly advantageous to repay it quickly.

In conclusion

I hope I have succeeded in enlightening you on the Home Buyers’ Plan and its benefits. I know it can be rather complicated to understand, so feel free to contact me for further explanations.

And you, are you planning on using the HBP?

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