In my recent are tile The Cost of Renting I talked about using your RRSPs to purchase a home. If you are looking to buy a home and you need a down payment you can loan yourself the money out of your RRSPs! Owning a home is one of the best investments a Canadian can make. Unlike stocks and bonds a person’s principal residence can grow in value and is exempt from capital gains tax.
Coming up with a down payment can be a real challenge but if someone has RRSP’s they can use the Federal Home Buyers Plan (HBP) to loan themselves a down payment. Currently almost half of all Canadian first time home buyers use the HBP. If someone has a down payment but doesn’t have any RRSP’s they could put the money into an RRSP (it must stay there for 90 days) and loan it back again. One might ask the question, “Why would you bother to do that?” Well, a tax deduction can be claimed, hopefully providing a tax refund from the government that can be used in the next tax year as part of a down payment!!!
Who qualifies for the HBP?
To qualify for the HBP a person has to have entered into a written agreement to buy or build a qualified home for themselves (or a related person with a disability) with the intention to occupy the home as their principal residence. Under The Income Tax Act the buyer must be considered a “First Time Home Buyer” (which means that neither the buyer nor a spouse/common law partner may have owned property in the last 5 years). Finally your HBP account must be at zero January 1 of the year that you intend to buy.
Once you qualify for the HPB you have a few more rules to follow….
The buyer(s) may not own the home for 30 days before the withdrawal is made and they must be a Canadian resident. All withdrawals must happen in the same calendar year and the purchase transaction/building of the home must complete before October 1, of the following year. (So be very careful when buying presale property as there is a chance that you will not be able to qualify and complete on time!)
Money….in and out
The HBP allows an individual to withdraw $25,000 from their RRSPs. If a couple (spouse/common law partner) are purchasing together, they can put $50,000 towards their purchase. The repayment process starts the second year following your withdrawal. The total amount must be paid off in 15 years with a minimum payment of one fifteenth a year. If you lent yourself $20,000 that is $1,333.33 per person ($20,000/15 = 1,333.33). Repayments do not count as new RRSP contributions and will not create any more tax incentives as that gain was already received the first time the original contribution was made…. Over payments can be made and they will lower the average payments that will be required on a yearly basis until the loan is re-paid in full.
Things to know about purchasing a home in Vancouver
· A down payment on a property of at least 20% saves you money because you do not have to pay for CMHC mortgage insurance.
· If a loan payment is missed that amount will be charged against your taxes as income for the year and the contribution room in the RRSP will be lost.
· Even if bankruptcy is declared, yearly repayments to the RRSP are still required.
This article is for information purposes only. If you are considering using RRSPs to purchase a home talk to a qualified professional advisor.
For the full government release on this information also see Form T1036