A valuable incentive that today's home buyers can take advantage of is the federal government’s Home Buyers’ Plan (HBP). In my experience, however, there is some confusion surrounding this program, so I’d like to take this opportunity to provide you with a clear, simple overview.
The HBP allows would-be home buyers the opportunity to withdraw up to $25,000 from their RRSP without incurring any withholding or income tax, and use it towards a home. The amount withdrawn then needs to be paid back into the RRSP over a 15-year period, with equal amounts due each year (i.e. 1/15th of the amount borrowed).
However, not all homes qualify for the HCP program. The home must be in Canada, it must be a principal place of residence, and it must be purchased (or built) by October 1st of the year following the withdrawal. So for example, if $25,000 is withdrawn on January 1, 2011, home buyers have until October 1, 2012 to apply the money towards the purchase of a home.
Now, there are some key things to keep in mind about the HBP, and this is where some people get a little confused – because there’s a lot of misinformation floating around out there. Let me focus on these key considerations one at a time:
To participate in the program, you must not have owned a home in the previous 5 years. This is important because some people think that this Home Buyers' Program is only for first-time home buyers. That’s not correct. While most HBP participants are first-time home buyers, not all of them are – you just need to not have owned a home for the past 5 years.
You don’t have to withdraw the maximum $25,000 from your RRSP. Yes, many people do (since a lower mortgage loan amount is always a good thing), but you don’t have to. You can withdraw any amount up to $25,000. If you only have $9,500 in your RRSP, then that's the maximum you can borrow.
If there are two people buying a home, each person can withdraw up to $25,000 from their respective RRSPs.
You are borrowing the money, but there is no interest to be paid on it.
When you withdraw any funds from your RRSP, it stops bearing interest in your RRSP. So keep this in mind when you think of the long-term financial implications of this strategy. Your withdrawal from your RRSP does, however, save you the compounded, after-tax, interest in your mortgage loan. The net effect is usually insignificant, or could possibly be to your benefit knowing today's low RRSP interest rates.
If you repay less than 1/15th of the amount withdrawn per year, the difference is automatically categorized as income for your annual tax return – so you’ll have to pay income taxes when you file. (...only on the 1/15th.)
The amount that you repay isn’t considered a new contribution to your RRSP, and so you don’t get any additional tax deductions on them. For example, if you withdraw $25,000, you’ll pay back $1,666.66 per year – but when you do, you can’t deduct that $1,666.66 as an RRSP contribution. Afterall, you already received the tax deduction when the initial amount was invested.
The program is quite easy to access and every mortgage broker and lender has access to all the paperwork that you'll need. To learn more about the HBP, visit the federal government’s website by clicking here.
Confused about the Buying Process or Financing your New Home?
Buying a home – especially a first home – can be a fun, but somewhat daunting experience. You don’t want to make any mistakes, because the financial consequences can haunt you for years.
Over the years, I’ve helped numerous home buyers (many first-timer buyers) get the guidance, support and honest answers they need. As an Accredited Buyers' Representative (ABR®), this is one of the many things I do for my buyer clients.
If you'd like anwers to your home buying questions and options, send me an email or call me at 403-860-8291 – I’m here to help!