Are you considering purchasing your first house and want to explore all available options to maximize affordability?
In that case, several government-provided programs are designed specifically to help first-time buyers. It can be stressful to save for a first house, but programs like FHSA (First Home Savings Account) and HBP (Home Buyers’ Plan) can make it easier. Both programs allow homebuyers to accumulate their down payment, and while they’re both tax-sheltered and registered plans, it’s essential to be aware of their specific features and restrictions. The similarities and distinctions between FHSA and HBP, as well as the requirements for both programs, will be clearly outlined in this post. You will have all the required information needed to make a decision about the ideal program by the end of the article.
An Overview of the Home Buyers’ Plan: If you’re a first-time homebuyer looking for ways to finance your new home, the Home Buyers’ Plan (HBP) is an excellent option. Using this plan, you are able to take money out of your Registered Retired Savings Plan (RRSP) in order to buy or construct a home for yourself or for a member with a disability. This plan’s best feature is that you may repay the money you withdrew within 15 years, making it a practical and adaptable choice.
Eligibility criteria for participation in the HBP
- To make RRSP withdrawals under the Home Buyers Plan (HBP), being a Canadian resident is essential.
- Must have an RRSP account to withdraw to be eligible for the HBP.
- You must be considered a first-time homebuyer.
- Must have a contract to purchase or construct a qualified house for you or a member with a disability.
- You must intend to make the qualifying home your principal residence within a year of purchasing or building it.
NOTE: Participants who have repaid the money they withdrew from their RRSP and meet all other HBP eligibility conditions can apply to use the Home Buyers’ Plan again, despite it being intended for first-time home buyers.
How does the Home Buyers’ Plan work?
After receiving approval for the Home Buyer’s Plan, you are allowed a tax-free withdrawal of up to $35,000 from your RRSP. Couples are allowed a combined withdrawal of $70,000, i.e. $35,000 each. Prior to making a withdrawal under the HBP, the RRSP funds must stay in your account for at least 90 days.
Repaying RRSP funds used for the HBP
Participants in the Home Buyers Plan have 15 years to reimburse the money they took out of their RRSP. The minimum annual repayment amount is calculated by dividing the time to repay the loan (15 years) by the amount withdrawn. For instance, if the allowable amount of $35,000 were withdrawn, the minimum annual repayments would be $2333. After the initial withdrawal, the first payment is due after two years. You can also pay back more than the owed amount to decrease overall yearly payments.
The FHSA: An Overview
The Tax-Free First Home Savings Account is a government initiative to support Canadians in saving for their new home. Homebuyers can save up to $40,000 tax-free, similar to a Registered Retirement Savings Plan (RRSP) contribution. Notably, contributions made to this account are tax-deductible, and withdrawals for the purpose of purchasing a new home will be non-taxable. The FHSA combines the features of both RRSP and Tax-Free Savings Account (TFSA). This savings account is designed for home purchases and allows first-time home buyers to contribute up to $8,000 annually, with a lifetime limit of $40,000. Unlike the RRSP Home Buyer’s Plan, the First Home Savings Account is a registered savings vehicle that enables you to grow your money without incurring tax penalties.
To open an FHSA account, you will need to provide the issuer with the following:
- Your SIN number.
- Your date of birth.
- Supporting documents that can certify you as a qualifying individual.
To be accepted for the program, applicants must satisfy these requirements:
- You must be a Canadian resident.
- The minimum age requirement is 18 or 19 years, depending on the province of residence. The maximum age limit is under 71 years of age.
- You must be a first-time homebuyer, and neither you nor your spouse should have owned a home that has been used as a principal residence at any point in the current calendar year and the four preceding years.
Similarities between FHSA and HBP.
- In both situations, the contributions are tax-deductible.
- To qualify in both cases, you should be a first-time homebuyer.
- Both programs demand being a Canadian resident.
- The contribution room rolls over annually for both programs.
- Various types of investments are possible for both programs, like GICs, bonds, stocks, mutual funds and other publicly traded securities.
Now let’s understand the differences between them:
|FHSA is a tax-deductible savings account that allows Canadians to save for their first home purchase over a longer period of time.
|HBP is more suitable for those who have already saved money in their RRSP and need to access those funds for their home purchase.
|No, repayment of funds is required.
|The funds removed from the RRSP account must be repaid within a 15-year period.
|Here there is no cap on the withdrawal amount. Only the deposits are limited to $8000 annually and a lifetime limit of $40,000.
|The maximum withdrawal limit here is capped up to $35,000.
|Here there is no holding period for the deposits to be tax deductible.
|You must keep the funds in your RRSP for a minimum duration of 90 days before they can be withdrawn for HBP use.
The Bottom Line
Both the FHSA and the HBP are excellent choices for increasing your down payment funds since they both provide tax benefits, even at the withdrawal stage. When saving for your down payment on a home, it’s a wonderful idea to speak with a financial advisor to see whether one, or both, of these methods is the appropriate match for you and your plan for making homeownership a reality based on your specific financial circumstances. You can also connect with our team of skilled specialists at Pegasus Mortgage Lending Center Inc. We will be happy to serve you in discovering the most relevant ways to find lenders and guarantee a better savings plan for your property.