If you’re thinking about buying a house and looking for a source of down payment, your RRSP might be the perfect source. Under the first time home buyers’ program, you can withdraw money from your RRSP account to use as a down payment towards the purchase of a property. Currently, an individual can withdraw up to $25, 000.00 from their RRSP account to purchase a property without incurring any withholding tax.
To qualify for the first time home buyer’s program, you must be a resident of Canada, have entered into a written agreement to purchase or build a qualifying home for yourself, and have not purchased or occupied a property you or your spouse own. In short, you haven’t purchased a property and this will be your first home you’re purchasing.
The funds being pulled under the program must have been in the RRSP account for at least 90 days before being withdrawn. Once the money has been pulled from your RRSP account to purchase a home, you have 15 years to repay the money back into your RRSP account. You are required to payback 1/15 of the amount each year until the balance is fully repaid. Repayments start in the second year after the funds were pulled. Any amount you fail to repay in any year will be added to your income in that particular year and might result in additional taxes.
For example, if you were to pull the full $25, 000.00 from your RRSP account to help with the purchase of a new home. You would be required to pay back approximately $1, 666 ($25,000/15) per year, which works out to about $139 ($1666/12) per month. Any year you fail to pay the full balance that portion will be added to your income.
But like anything in life, there are some drawbacks to this program. One of the biggest drawbacks is you give up any potential future growth the money in your RRSP might have had if you had continued to invest the money. The yearly repayment requirement might cause some cash flow problems, therefore, it’s important you ensure you can afford the repayment requirement before pulling the money from your RRSP account under the program.
Lastly, some tips and things to keep in mind. While most people use the first time home buyers program as a down payment, it’s not the only thing you can use the funds for. As long as you qualify for the first time home buyer program, what you ultimately decide to use the funds for is up to you generally speaking. For example, the funds could be used to cover moving or legal cost.
It’s also important to note that while you’re able to pay more than 1/15 each year, it’s best to pay just the minimum amount you’re required to under the program. If you claim more of your RRSP contribution against the first time home buyers repayment plan, less of your contributions can be claimed against your income. Remember, this is a loan to yourself and there’s not an absurd high interest rate being charged to you, in fact, there isn’t any interest being charged. RRSP contribution towards the home buyers program cannot be deducted against your taxable income, therefore, there’s no real advantage to repaying more than the yearly required from a tax standpoint.
The first time home buyer program is my favorite type of financing. Why? Because you get to be the lender, the customer, and the borrower. But more importantly, you get all the benefits and future profit when using this program to buy your first home.