Thinking about buying your first home in Brampton, Toronto or the GTA? Wish you could save up more for a good down payment? Many first-time buyers aren’t aware that they can use their RRSP funds for the purchase or even construction of their first home. The federal Home Buyers’ Program has been around for many years and was specifically designed to help first-time buyers get into home ownership.
The most common reason to use this program is to boost the down payment for your purchase. The bigger your down payment, the smaller your mortgage. And you may qualify for better interest rates since your healthy down payment shows the lender that you are a low-risk candidate for your mortgage.
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 tax-free. You pay taxes on the funds when they’re withdrawn later. But there are some valid reasons why you may want to access these funds earlier, like your home purchase.
As a first-time homebuyer, you can withdraw money tax-free, provided you adhere to the repayment plan. Just make sure that your RRSP is not a locked-in plan. You can withdraw up to $35,000 from your plan. If your spouse qualifies as a first-time homebuyer, then he or she will also be able to withdraw $35,000. Between the two of you, you could possibly add $70,000 to your down payment. That’s enough to make a substantial difference in the affordability of your home!
There are some conditions that you should know about. 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. Most importantly, 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 must include each repayment amount as income for that year.
A common question is – who exactly qualifies as a first-time homebuyer? What if one partner has owned a home before, for example? Often 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 first- time homebuyer!
Any kind of home qualifies for the program – detached, semi-detached, mobile, condominium, etc. – if it is located within Canada and will be your principal residence within one year. Detailed information is available on the Canada Revenue Agency website. Look for T1036, which is the form required for requesting a withdrawal.
Tip to get a tax refund to bolster the savings you already have! You can use your downpayment savings to make as big an RRSP contribution as you can before the March 1 contribution deadline for the 2020 tax year – up to the maximum $35,000 per person but not more than your contribution limit. After 90 days you can redeem your contribution under the HBP program, giving you your original downpayment funds back PLUS a nice tax refund for your contribution amount. This is a great way to let the tax man help you buy your first home!
Questions? Get in touch at any time to talk about how you can use your RRSP to help you get into your first home purchase in Brampton, Toronto or the GTA. It’s a great strategy that many don’t know about. That’s why it’s always a good idea to have a conversation as early in the homebuying process as possible. A good plan is the best way to a great beginning!
