So you decided to buy your first home and like all first-time home buyers, you’re really excited but have lots of questions, such as, how much will the mortgage be? What kind of a downpayment do I need? And likely, how does the first-time Home Buyers’ Plan work? Although we won’t be able to answer all of these questions now, we’ll instead focus on the Home Buyers’ Plan.
The Home Buyers’ Plan is a governmental program that can really help families achieve their dream of owning their own home. Simply, you’re able to borrow funds from your Registered Retirement Savings Plan(s) (RRSP) and use them for housing purposes. These borrowed funds are then repaid over a period of fifteen years (more on this later).
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How Does the Home Buyers’ Plan Work?
Individual homeowner can borrow up to $25,000 and joint homeowners can withdraw up to $50,000 from their RRSPs. While your free to use these funds for whatever purpose you choose, the greatest benefit usually arises when you use the funds towards your downpayment. A larger downpayment will reduce your mortgage amount, interest paid and CMHC fees.
More can be found about CMHC fees here
The Repayment period begins the second year after your Home Buyers’ Plan withdrawal. These Repayments occur over 15 years and the repayment amount will be 1/15th of the initial withdrawn amount. For example, if I withdrew $15,000 on May 19th, 2015, then the first repayment ($1,000) would be due during the 2017 tax year.
How to Qualify for the Home Buyers’ Plan
There are a few conditions that must be met to qualify for the Home Buyers’ Plan. The most stringent condition is that you’re deemed to be a first-time homebuyer by the government. To qualify as a first-time homebuyer, the purchasers (includes common-law relationships) must not have owned a primary residence or home within a period of five years before the Home Buyers’ Plan withdrawal. This five-year period includes the current year and begins on January 1st of the first year. The CRA gives the following example; if you withdraw funds on March 31, 2015, the five-year period begins on January 1, 2011 and ends on February 28, 2015. The purchased property must also become the buyers’ primary residence within a period of one year following the Home Buyers’ Plan withdrawal.
Other conditions that apply are; applicants must be Canadian residents, all withdrawals must be made in one tax year and that a home purchase agreement or new build agreement must be in place.
Importantly, funds that are withdrawn from an RRSP must have been in a registered account for over 90 days in order to qualify for income tax deductions. Therefore, households can maximize their financial benefits if they plan accordingly.
Withdrawing from the Home Buyers’ Plan
Withdrawing funds from the RRSP account is a very simple process. Once you’ve confirmed that you qualify for the Home Buyers’ Plan, you simply bring in a completed “Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP” form to whomever holds your RRSPs. The bank representatives can usually process the request right away and the funds will be available within a couple business days. If your RRSPs are invested in restrictive investments or accounts, like locked-in GICs, then you may need to discuss withdrawal conditions further.
Repayment of Home Buyer’s Plan
As mentioned, you will have an annually minimum payment that is due in the second tax year following the withdrawal. Repayments are simply made like any standard RRSP contribution at a financial institution and can be made at any time during the tax year, including the first 60 days of the following year.
Overpayments can be made during any tax year with the effect of reducing your future repayments. If you don’t make a payment or make a partial payment then the outstanding amount will be added to your current year’s taxable income and taxed accordingly.
Also, if for any reason the house sale does not go through, then the withdrawn funds can usually be returned with no negative consequences.
Home Buyers’ Plan Considerations
There are a couple concerns that should be made before one decides to utilize the Home Buyers’ Plan. The main issue is that you will lose the tax-free compounding ability of RRSPs when you remove the funds and this will affect your future RRSP income. The lack of available investment funds also may cause you to miss investment opportunities.
Another concern is reduced future cash flow; as you recontribute back to your RRSPs you will have the additional expense of RRSP repayment. For example, if a couple withdrew $50,000, then their annual payments would be $3,333.33 a year or $278.79 a month.
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