Buying a first home can be a tough journey. Especially trying to come up with a 20 per cent down payment in order to avoid having to purchase mortgage loan insurance.
Under the Home Buyers’ Plan (HBP), first time homeowners can borrow up to $25,000 tax free from their RRSPs to buy or build a home. If you are purchasing a home with a spouse, you can each withdraw $25,000 if you qualify.
Here are a few things to consider:
The Pros
• If you can use your RRSPs under the plan to make that 20 per cent down payment, you might not only avoid paying the mortgage loan insurance, but you could also qualify for a lower interest rate.
• With a larger down payment, your monthly mortgage payments will be smaller
• This is one of the only ways to make a tax-free withdrawal from your RRSPs
• Your RRSP can help you buy your first home if you don't have much in terms of savings. This is a great option for young adults.
• There is no penalty for repaying more each year than what your scheduled payment amount is.
• It is a tax-free and interest-free loan over a 15-year span.
The Cons • You will lose years of compound growth, depending on how fast you reinvest your money.
• The HBP means that you are taking on debt. Except, instead of owing to credit card companies or the bank, you owe it to yourself.
• If you don’t make your repayment each year, the unpaid amount is fully taxed as income for that year.
• If you declare bankruptcy, you will still need to make payments back into your RRSP each year.
My Plan
When it comes time to buy my first time, I will definitely be utilizing the HBP. The Vancouver real estate market is expensive. So for the past four years, I have been saving for part of my down payment by contributing to my RRSP. This allowed me to receive a tax refund each year, which I reinvested back into my RRSP.
The reason why I am confident in using my RRSPs to help pay for my down payment is because I am an aggressive saver. I invest between $8,000 and $10,000 a year in my RRSP, so I know I will be able to contribute towards my future and have my retirement account back at its previous amount within just a few years. This means I will minimize my loss in compound growth, and fully benefit from avoiding the mortgage loan insurance by having a 20 per cent down payment.
Plan eligibility • You have to be a first-time home buyer (or buying for somebody who is disabled) and a resident of Canada.
• You must intend on living in the house purchased under the HBP within one year of purchase or completion. However, there is no minimum amount of time that you have to stay there.
• You must have entered into a written agreement to buy or build a home.
• You cannot own the home for more than 30 days before the withdrawal.
Plan rules • Starting the second year following the year in which you made the withdrawal, you will need to start repaying the money back into your RRSP.
• You have up to 15 years to repay the full amount, where each year 1/15th of the total amount is due. For example, if you withdrew the entire $25,000, you would have to make payments of $1,666 each year for the next 15 years.
• RRSP contributions made less than 90 days before your withdrawal date cannot be used towards the HBP. This means you wouldn’t be able to make a last-minute contribution into your RRSP in order to take it out again for the HBP.
For more information on eligibility and rules, please visit the CRA website.
Repaying the HBP
You don’t actually have to make your first payment until the second year following the year in which you made your withdrawal. For example, if you withdrew your money in 2010, you wouldn’t need to make your first payment until the tax year of 2012.
The annual repayment amount is determined by the total amount you have borrowed from your RRSP, divided by 15. If you pay more than the minimum each year, future payments will be the remaining amount owing divided by the number of payment years you have left to go.
Your notice of assessment will have all of your Home Buyers’ Plan information on it, including payments due, so you won’t have to calculate the payments yourself.
Would you consider using the Home Buyers’ Plan?
Krystal Yee is a marketing and graphic design professional living in Vancouver. She also blogs at Give Me Back My Five Bucks.
