IF YOU ARE PLANNING ON BUYING YOUR FIRST HOME, RRSP'S CAN BE YOUR BEST FRIEND!

THIS IS A GREAT ARTICLE I JUST READ THAT EXPLAINS THE FIRST TIME HOME BUYERS' PLAN VERY WELL. IT MAKES A GREAT CASE FOR WHY RRSP'S ARE SO IMPORTANT AND CAN BE AN EXCELLENT FINANCIAL PLANNING TOOL FOR FIRST TIME HOME BUYERS!

"Are you looking to buy your first home? If so, why not let the government help you pay for it?

With housing prices as high as they are, it’s difficult to come up with the down payment required to avoid the high costs of CMHC (Canadian Mortgage and Housing Corp.) insurance. You can buy a house with as little as 5% down, but the insurance costs will run you as much as 2.9% of the loan.

To get around this high cost, many first-time homebuyers will try to come up with 20% of their house price as a down payment and use their RRSPs to do that.

The Home Buyers’ Plan is a program that enables first-time homebuyers to use up to $25,000 from their RRSPs as a down payment. If you and your spouse or common-law spouse are interested in using this program, you can pool your resources and fund up to $50,000 from your RRSPs combined ($25,000 each). This will give you enough funds to purchase a $250,000 home and carry a conventional mortgage.

You will have to repay these amounts to your RRSP over a 15-year time frame, starting the second year after you borrowed the funds at a rate of one-fifteenth of the amount borrowed per year. A $25,000 loan from your RRSPs would create a repayment of $1,667 a year over 15 years. If you do not repay that amount in any given year, you would include that $1,667 as income for the year and pay the income tax on that amount.

This is an excellent way to help you generate enough funds to realize the dream of owning your own home and it is another reason to make sure you are contributing to your RRSPs as much as you can and as early as you can. The amount you can contribute to your RRSP is dependent upon your income.

If you do not contribute in any given year, you can carry forward that RRSP contribution room to future years. This is why we encourage young people to make sure they submit a tax return every year they have earned income, even if they are earning a minimum amount of money. A $10,000 annual income will create RRSP contribution room of $1,000 that can be used later on in the Home Buyers’ Plan.

There are some restrictions on who qualifies as a first-time homebuyer, but you can participate in this program more than once if you have not owned your own home for at least five years. The money also needs to be in your RRSP for at least 89 days prior to using it for a down payment under this program, so planning ahead is important.

Outside of the tax-deferred compounding effect of an RRSP, you will also generate a tax refund on all amounts contributed to your plan. So, if you are in a 31% marginal tax bracket at around $50,000 income and contribute $9,000 to your RRSP, you will get a refund of $2,790. These funds can be rolled into a Tax Free Savings Account to also go toward your new home or can be contributed to your RRSP in the next year to go toward the Home Buyers’ Plan — and get another 31% refund on that money.

Buying your first home is a huge decision and it takes good planning to come up with the money needed. This is not something you will be able to do on the spur of the moment, so keep your options open and use your RRSP to its full potential. Generate the tax breaks and benefit from tax-deferred compound growth and, if you do not own a home, try to make sure you have at least $25,000 in your RRSP and your spouse’s RRSP so you can take advantage of the Home Buyers’ Plan."

Doug Riding BA, CFP, FMA, is a senior associate with Investment Planning Counsel


 

    
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Ventura Realty Ltd. Halifax, Nova Scotia Canada