It costs a lot of money to buy a house. Qualifying home buyers need a minimum 5% down payment to purchase a home, and with rising real estate prices, buyers need to have more money saved to afford a down payment.
Thankfully, the Canadian government understands the pressure and financial strain that many Canadians are under. As a result, they have created the RRSP Home Buyers' Plan to help make affording a down payment a bit easier.
This blog will explain what the Home Buyers' Plan is, how it can help first-time buyers, and its benefits and downsides to help you understand and take advantage of this program.
The Home Buyers' Plan (HBP) is a program that allows first-time homebuyers to withdraw from their registered retirement savings plans (RRSPs) to either buy or build a qualifying house for themselves or a related individual with a disability. The maximum withdrawal amount is $35,000 per person. If two spouses are purchasing or building a house together, both can take advantage of the program and have $70,000 at their disposal.
Utilizing your RRSP account to pay for your first home is a smart decision. Many advantages come with using your RRSP funds to pay for your down payment. We will touch on these benefits below.
If you’re 18 years of age or older, you can contribute 18% of your annual income (up to $29,210) to your RRSP, tax-free. The contribution room carries over every year, allowing you to save more money for retirement. Every RRSP contribution is tax-deductible, meaning that you will receive a tax refund for the amount you contribute to your retirement fund.
You will be taxed on each RRSP withdrawal if you take money out of your registered retirement savings fund before retirement. Thankfully, RRSP withdrawals under the First-Time Home Buyers' Plan do not have to be claimed on your income tax return. In other words, you will not have to pay tax on the withdrawal. You can receive a tax refund by saving for retirement and you can use that money tax-free to pay for your first home. It’s a win-win situation.
It can be challenging to save for a home and retirement when paying your bills. But, with the HBP, you don’t have to stretch yourself thin trying to save money for your retirement and your first home purchase. You can focus all your additional earnings on your RRSP contribution and use your RRSP for your first house.
The obvious benefit of the Home Buyer's Plan is a down payment! You will have the funds to purchase a home. Additionally, the HBP will allow you to have a substantial down payment. The larger the initial payment, the smaller your mortgage loan will be. This is beneficial because you won’t have to worry about compound interest building up on an additional $35,000 to $70,000 of your mortgage loan. However, you may have to worry about being taxed if you do not repay your RRSP withdrawal when your repayment schedule is complete.
It’s important to note that the funds that you withdraw from your RRSP have to be repaid; the Canada Revenue Agency requires every first-time home buyer to repay their withdrawal. Otherwise, it will be considered RRSP income and you will be charged tax.
Thankfully, you do not have to start paying it back within the same calendar year or anytime soon after that. The following year after your purchase, you must make your first repayment installment. You then have 15 years to complete repayment, paying back the remaining balance you had withdrawn from your RRSP.
To take advantage of the HBP, you need to meet their eligibility requirements:
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