First-time homebuyers & RRSPs

Thinking about buying your first home? Wish you had saved up a good down payment? Maybe you have, but didn’t know it.

Designed to help first-time buyers get into home ownership, the federal Home Buyers’ Program lets you access tax-free monies for use towards the purchase or even construction of your first home.

Why tap into your RRSP? The most common reason is to boost the down payment on a home. The bigger your down payment, after all, the smaller your mortgage. And you may qualify for better interest rates too; your healthy down payment shows the lender that you are a low risk candidate for a mortgage loan.

Here’s how it works. If you’ve been contributing to an RRSP, then you already know that the program is designed to set aside money for retirement, with the money going into the program taxfree (paying taxes on the funds when they’re withdrawn later). But there are some valid reasons why you may want to access these funds earlier. A home purchase may be one of them. As a first-time homebuyer, you are allowed to withdraw money tax-free, provided you adhere to the repayment plan. (Just make sure, of course, that your RSP is not a locked-in plan.) You can withdraw up to $25,000 from your plan. If your spouse qualifies as a first-time homebuyer, then he or she will also be able to withdraw $25,000. Between the two of you, you could possibly have a hefty down payment sum of $50,000. That’s enough to make a substantial difference in the affordability of home ownership!

There are some conditions that you should know about. For example, you must enter into a written agreement to buy or build before you can withdraw money. And you are expected to complete the home purchase no later than October 1 of the year following your withdrawal. In addition, all HBP-eligible withdrawals must be made in the same calendar year, and you can’t have owned the home more than 30 days before the date of withdrawal. Above all, you must meet certain repayment terms. Repayment to your RSP begins the second year following the year of withdrawal. You have up to fifteen years to repay, and each annual repayment must be at least one-fifteenth of the total withdrawal, otherwise you have to include each repayment amount as income for that year.

A common question: so who exactly qualifies as a first-time homebuyer? What if one partner has owned a home before, for example? Well, it often happens that only one partner qualifies as a first-time homebuyer, so only one RRSP can be tapped for funds. But if either of you has not owned a home for the past five years, then you meet the description of a firsttime homebuyer!

Any kind of home qualifies for the program – detached, semi-detached, mobile, condominium, etc. – as long as it is located within Canada and will be your principal residence within one year. A detailed booklet is available on the Canada Revenue Agency website. Look for T1036, which is the form required for requesting a withdrawal. If you’re thinking of using your RRSP for your first home purchase, consider meshing your RRSP strategy with your down payment savings. Putting away funds in your RRSP not only saves you the current income tax, but any tax refund translates into more dollars towards your down payment. If you have RRSP contribution room, you can make your contribution now and then after 90 days you can redeem your RRSP under this plan, using your tax refund to bolster your down payment.

Let’s have a conversation about your future plans for home ownership. A good plan is always a great beginning!

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