Are you a first-time home buyer in Canada? Let us tell you that one useful source of funding for your mortgage down payment is a Registered Retirement Savings Plan (RRSP). The Canadian Government’s Home Buyers' Plan (HBP) permits first time home buyers to borrow up to $35,000 from their RRSP for a down payment, tax-free. If you're buying with someone who is also a first-time homebuyer, both of you can access $35,000 from your RRSP for a shared total of $70,000. However, as the HBP is considered a loan, you must repay it within 15 years. This article presents some useful tips to use your RRSP as a first-time home buyer in Canada, sharing relevant information like withdrawal, how long does money have to be in RRSPs before you take it out for home, the rules, application form, repayment terms, and some cons to keep in mind.
The Interest-Free Nature when using your RRSP for a down payment
Essentially, through RRSP, you lend yourself the money, interest-free. You pay back the money within 15 years. So, if you have taken out $35,000 from your RRSP, you owe back $2,333 every year ($35,000/15 years). If you were unable to make those payments, the $2,333 is added to your income and you will pay tax on it at your marginal tax rate.
Are you Eligible for the Home Buyer Plan (HBP)?
To be eligible for a first-time home buyer in Canada and avail RRSP plan, you should never have owned any kind of property in Canada before. If you buy a first home with a partner who has bought a home in the past, you can still use RRSP as a first-time homebuyer. However, your partner cannot.
Repayment Rules for using RRSP for down payment
The HBP is technically a loan, even while you withdraw your own money. So, you must pay it back within 15 years. Any repayments to your RRSP are the repayment of the loan. Thus, they do not have the same tax benefit as the initial investment.
Besides, payment is to be made every year. To calculate your minimum annual requirement, divide the total withdrawal amount by 15 years. Anything above and beyond that minimum installment goes towards your HBP repayment. Otherwise, you can claim it on your RRSP, and therefore it is tax-deductible. If you do not pay the annual minimum, the same is added to your income as a taxable income.
The First time home buyer RRSP Withdrawal is quite simple. Here is how to do:
To make an RRSP withdraw to purchase your first home, you must fill out an application form called T1036. Every time you withdraw from your RRSP, this application form must be filled. You fill out section 1 and return the same to the issuer of your RRSP. Then, the issuer fills out section 2 and submits it on your behalf.
Moreover, to qualify for withdrawing RRSP funds, the deposit must be there for at least 90 days.
The RRSP disadvantages to Keep in Mind
Though RRSP gives significant support to make your home purchase; however, your ultimate decision to go for it must also consider its disadvantages, which include:
- It’s a removal of funds from your retirement savings
- By removing these funds, you are losing the interest you might have made had the funds remained invested
- You repay it in full and RRSP contributions to repay the HBP don’t count towards a deduction.
Purchasing your first home is one of the biggest purchases you will ever make. It is difficult to get into the Canadian real estate market; however, knowing the available solutions can help. Government benefits, such as RRSP by HBP, make it a little bit easier for Canadian citizens to turn their dream of homeownership into a reality.