The straight talk on falling mortgage rates and the Home Buyers’ Plan

In late January, the Bank of Canada dropped its interest rate to .75 per cent from 1 per cent in an attempt to soften the blow of falling oil prices on the Canadian economy.  It was a move that surprised the financial world, and many were left wondering if the big banks would follow suit.  In the days that followed, BMO announced that it was lowering its 5-year variable mortgage rate to 2.85 per cent, as did other financial institutions.  But what does all this mean for the home building industry?

At the onset of 2015, most economists were expecting an increase in mortgage rates, but now it seems that climbing rates have been put on hold.  For how long, is anybody’s guess, so for those thinking of buying a home, now may be the time.  But what about a down payment?  For most of us, saving a down payment is downright impossible.  It’s for this reason that the Canadian government developed the Home Buyers’ Plan.

What’s the Home Buyers’ Plan?

The Home Buyers’ Plan is a government program that allows you to withdraw funds from your RRSP to buy or build a qualifying home.  You can take out up to $25,000 in a calendar year, and you have 15 years to pay it back.  You just have to make sure that any funds you’re withdrawing have been in your RRSP for a minimum of 90 days.  Plus, if you’re buying or building with your spouse/common-law partner, they too can withdraw up to $25,000 from their RRSP.

**Note: some RRSPs, like locked-in or group RRSPs, do not allow you to make withdrawals, so make sure you speak with your RRSP issuer before you begin the home buying process.

The Conditions

Of course there are conditions; this is a government program after all.  But, they’re actually not that complicated or unreasonable.  The first stipulation is you have to either be a first-time home buyer or be considered a first-time buyer as outlined by the program.  Now, the Canada Revenue Agency has a great online booklet about the Home Buyers’ Plan that you can download.  Be warned, however, that the language is a little convoluted at times.  For example:

“You are not considered a first-time home buyer if you owned a home  that you occupied as your principal place of residence at any time during the period beginning January 1 of the fourth year before the year of the withdrawal and ending 31 days before the date of the withdrawal.”

Huh?  I know.  Basically, if you are withdrawing money from your RRSP in 2014, you can’t have owned a home anytime after January 1st of 2010.  Even if you sold a home with a closing date of January 2, 2010, you couldn’t withdraw under the Home Buyers’ Plan until 2015.

Other conditions include entering into a written agreement to buy or build a qualifying home, using the home as your main residence, and being a resident of Canada.

Repaying your withdrawals

Under the Home Buyers’ Plan, you have 15 years to pay back your RRSP withdrawals.  Your repayment period starts the second year following the year you made your withdrawals.  So, if you withdraw your funds in 2014, you have to start making payments in 2016.  You can begin your repayments earlier, and you can repay more than the yearly amount due (which is 1/15th of what you withdrew).

So, there you have it, falling mortgage rates and the Home Buyers’ Plan at a glance.  Again, the CRA website has a lot of great information on the plan.  You can also ask your mortgage lender for details.  As for mortgage rates?  We’ll have to just wait and watch like everyone else.