One of the biggest roadblocks that first time home buyers face in their quest to purchase their home is gathering enough money for a down payment. The minimum down payment in Canada on a home less than a million dollars is 5%, and the minimum down payment for the same house without having to purchase mortgage insurance from a provider like CMHC or Genworth is 20%. Luckily, Canadians can make use of the Home Buyers Plan (HBP) in order to help them reach the minimum 5% down, or gather enough money to avoid CMHC insurance at 20%.
What is the Home Buyers Plan?
The Home Buyers Plan is a program that allows you to make a tax-free withdrawal from your RRSP (Registered Retirement Savings Plan) and put that money towards a down payment. You can withdraw up to $25,000 in a calendar year from your RRSP. The one caveat is that you need to repay the amount that you withdrew within the next 15 years. You will not receive another tax refund for the money you re-paid your RRSP. This money can go towards the purchase or construction of a qualifying home.
What is a Qualifying Home?
Under the Home Buyers Plan, a qualifying home must meet the following guidelines. You (and your spouse) must not have owned a home in the previous four years, the house must be your principle residence, and you can’t use RRSP contributions that you made in the past 90 days.
Home Buyers Plan Strategies
There are a few ways that you can take full advantage of the Home Buyers Plan to help afford a down payment:
Your RRSP and your spouse’s plan RRSP are considered separate, so you can each withdraw $25,000 in a calendar year to put towards the same house, if you both qualify. A $50,000 down payment should put you over the minimum 5% down payment.
If you’re planning on purchasing a home next year, now is a great time to take full advantage of the Home Buyers Plan. You can take out an RRSP loan and put it into your RRSP savings right now, which will give you a large tax return in the spring. You can use that return to help you pay back some of your loan. When you are ready to buy your home, you can withdraw the money from your RRSP tax-free. It’s a smart way to use the tax rules of the RRSP and HBP to your advantage in order to afford your home sooner.
If you have any questions about the Home Buyers Plan & RRSP loans, or any other inquiries about mortgages or down payments, be sure to contact The Mortgage Advisors today!