First Time Home Buyer Loan
RRSP Down Payment Strategy
There are a couple of opportunities available for the First Time Home Buyer Loan, or Mortgage, that are not available for second (third, etc.) home purchasers.
The big one is the RRSP Down Payment Program. As a first time home buyer in Canada, you have the opportunity to withdraw funds from your RRSP without incurring any tax penalties.
For the specifics of the program visit the CRA website for RC4135 Home Buyer's Plan (HBP). Here are the highlights:
- You can withdraw up to $25,000 in 1 calendar year
- The RRSP contributions must have remained in the RRSP for at least 90 days
- The RRSP funds withdrawn must be paid back over 15 years
- If you do not repay the amount due for a given year, then you will have to include that amount in your income for that year
There are specific rules & exceptions about who qualifies as a first time home buyer and much more detail about the program at the link above.
How can a First Time Home Buyer take full advantage of this program?
James & Michelle used this Home Buyer Plan to arrange their First Time Home Buyer Loan. In December their landlord told them that he planned to sell the home they were renting and gave them 3 months notice.
James & Michelle had good jobs and each earned good income (in the 30% tax bracket). They had around $5,000 in savings but that wasn't enough for a down payment.
They decided to speak with a mortgage broker. Steve (mortgage broker) told them that this was the perfect time for them to take advantage of the Home Buyer's Plan using their RRSP's.
Michelle explained that they didn't have any RRSP's, but they each have just over $25,000 in contribution room available.
Steve explained the plan: Michelle & James can each take out an RRSP Loan (amortized over 3-5 years) for around $25,000 and contribute this amount to a New RRSP. Because they are in the 30% marginal Tax Bracket, they should each receive approx $7,500 back once they file their tax returns.
They must keep the money in their RRSPs for 90 days before they withdraw the funds under the first time HBP. Once they have written the Offer to Purchase their first home, they can withdraw the $25k each. They take this money and pay off the RRSP Loan of $25k each.
The down payment generated is not from the RRSP directly, but it's from the Tax Rebate that they receive because they contributed to their RRSP!
Steve recommended an accountant for them to review this plan to calculate more accurately their exact tax refund. He also recommended a Financial Planner for them to set up the RRSP Contribution.
Step 1: Mortgage Pre-Approval
Michelle & James completed a Pre-Approved Mortgage Application to determine the price range they qualify for. They also locked in an interest rate for 120 days. This gave them security, in case the interest rates rose over the next 3 months, while they employed this RRSP Strategy.
Step 2: Review the RRSP Strategy with an Accountant
After reviewing the numbers, the accountant advised them that James should receive around $8,700 and Michelle would receive approx. $7,100 once they set up the RRSP and file their taxes.
During this process James & Michelle told their parents what had happened and their plan. Their parents were really excited about the plan and offered to give them each a gift of $5,000 to help with their home purchase.
Step 3: Set up the RRSP Loan & RRSP Contribution
James & Michelle immediately set up the appointment with the Financial Planner to begin the process. They arrange the RRSP loan for $20,000 but deposited $25,000 each into their RRSP. They used their parents gifted funds to increase the RRSP Contribution to the maximum allowed.
This first time home buyer loan RRSP Strategy will provide them with $15,800 ($8,700 + $7,100). The tax refund, their savings and the $10k in gifted funds will result in a total of $30,300 ($15,800 + $5000 + $10,000)! These funds can be used for the down payment, to cover closing costs and even purchase some essentials for their new home.
Michelle & James withdrew the $25k from their RRSP's under the Home Buyer Plan. They will have to contribute $1,666.66 ($25,000/15) to their RRSP's each year for the next 15 years to repay the First Time Home Buyer Loan. If either Michelle or James don't contribute one year, they would then declare an additional $1,666.66 of income that tax year and pay taxes on this amount of income.
Could you increase your down payment using this RRSP Strategy? Complete a Quick App and start the process!
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