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Buying Your First Home: Three Steps to Successful Mortgage Shopping
Step 1: Know what you need and want in a mortgage
- Down payment
- Home Buyers' Plan
- Mortgage payments: interest versus principal
- Mortgage types: open or closed
- Amortization period
- Mortgage term
- Interest rates: fixed, variable or hybrid
- Payment frequency
- Mortgage default insurance
- Other insurance options
- Mortgage registration: standard or collateral charges
- Home equity lines of credit (HELOC)
- Mortgage options
Home Buyers' Plan
The Home Buyers' Plan (HBP) allows you to withdraw money from your Registered Retirement Savings Plan (RRSP) tax-free to use for a down payment.
You must meet certain conditions to be eligible for the HBP. For more information, contact the Canada Revenue Agency (CRA).
How much can you withdraw?
- You can withdraw up to $25,000 from your RRSP. Contributions must be in your account for at least 90 days before they can be used for the HPB.
- If you buy the home together with your spouse, partner, or someone else, each of you can withdraw up to $25,000.
- The withdrawal from your RRSP does not need to be included in your income on your annual income tax return, and no tax is taken off the money you withdraw.
What is the payback period?
- Starting the second year following your withdrawal, you must pay back all withdrawals from your RRSP within 15 years by making RRSP deposits each year. CRA will determine what your minimum yearly repayment will be and will notify you once you need to start repaying the amount.
- If you do not repay the amount due in a given year, it is included in your taxable income for that year and you'll have to pay income tax on this amount.
Example: HBP repayment
In 2013, Martin withdraws $15,000 from his RRSP to participate in the HBP to buy a home. Martin's minimum yearly repayment to his RRSP, starting in 2015 (two years after purchase), will be $1,000 ($15,000 ÷ 15 years).
If Martin decides not to make any reimbursement in 2015, he will have to include $1,000 in his income when he files his 2015 income tax return. His minimum yearly HBP repayment, however, will remain at $1,000 for the following years.
On the other hand, if Martin decides to make a HBP reimbursement of $3,000 to his RRSP in 2015, his minimum yearly repayment for 2016 and the following years will be $857.14 ([$15,000 - $3,000] ÷ 14 years).
Questions you should ask yourself
- Will you be able to make the repayments? If not, using your RRSP funds to purchase a home can end up costing you a lot in income tax.
- Can you use the HBP to avoid having to buy mortgage default insurance? If you can use your RRSP investments to increase your down payment to at least 20% of the purchase price of the home, the savings may be significant. See the section on mortgage default insurance for more information.
- How will withdrawing the funds impact your retirement savings plan? Although you will need to repay the funds in the future, you will lose out on any growth while the funds are withdrawn.
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