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Saving a down payment is a problem for many new home buyers. High home prices and strict mortgage rules require up to a 20% down payment for houses with a sale price of over $1 million. At the same time, you may also be trying to save for retirement or for other life events. The Home Buyers' Plan provides an option that helps avoid choosing between saving for your home and saving for your future. You can use up to $35,000 contributed to a Registered Retirement Savings Plan (RRSP) towards your down payment on a home. These are the basics of the Home Buyers' Plan and how you can use it to help fund your down payment.

How the Home Buyers' Plan Helps

Money contributed to an RRSP comes with tax benefits that your tax accountant is much more qualified to explain. But in the simplest terms, the money contributed to an RRSP has not yet been taxed. So if you were to withdraw it - say to pay for a new home purchase - you would be faced with a potentially large tax bill. The Home Buyers' plan allows the money to be used without first being taxed - provided you make regular contributions to pay it all back within 15 years. So, the Home Buyers' Plan helps by giving you access to your savings, tax-free, when you need it to purchase your home.   

Qualifying for the Home Buyer's Plan

To qualify for the Home Buyer's Plan, you must be a first-time homebuyer or, if you have used the plan before, must have fully repaid the balance. 

If you are purchasing a home with a spouse or partner, one or both of you can take advantage of the plan. That means together, you can source up to $70,000 of your down payment from RRSPs.    

Repayment Under the Home Buyer's Plan

Having to pay back money from your own savings is somewhat counterintuitive. To explain, you have to understand what an RRSP is and is not. An RRSP is a way of sheltering your money from income tax today by labelling it as destined for the future. It is not a savings or investment account. Under the terms of the Home Buyer's Plan, you can use some of the designated money. You'll need to replace it over the next 15 years or else pay income tax on it.   

Repayment works by taking the amount withdrawn and dividing it by the 15 years you have to pay it back. Each year, you are required to purchase an RRSP eligible investment for that amount. Then, designate the contribution as a Home Buyers' Plan repayment (instead of a new RRSP contribution) on your tax return. 

To summarize, when using the Home Buyers' Plan, you must be prepared to repay 1/15th of the borrowed amount back each year. The amount cannot be added to your mortgage, nor will the bank or investment company remind you about repayments. You are responsible for making the appropriate contribution before each year's tax deadline or you will be charged tax on that amount.  

The Benefits of the Home Buyers’ Plan

One of the benefits of the plan is that you don't need to choose between saving for a home and possibly benefiting your tax situation by contributing to your RRSP. The money is easily accessible, and you have plenty of time to repay it. Since you are not borrowing anyone else's money, there is no interest cost. However, that doesn't mean that there are no costs at all. 

The Cons of the Homeowners Plan

One of the best things about an RRSP is that your retirement savings are allowed to grow within the tax shelter tax-free, unlike some other non-RRSP investments. You'll lose out on that growth, especially if you take the full 15 years to repay it. However, your home will also likely appreciate in value during that time, perhaps more than your investments would.  

As you make your plans to buy a home, talk to a mortgage broker who can help you understand how much you need for a down payment and some of the options for funding it.