Using funds from your RRSP to buy your first home

It is very hard to save funds to purchase your first home. The Government of Canada has recognized this and has created the Home Buyers Plan. In this plan people with funds in their retirement savings plans (RRSP) or other retirement plans (Pooled registered pension plan (PRPP) or Specified pension plan (SPP)) can remove funds to be used as part or all of their down payment for their first home purchase.

GENERAL GUIDELINES OF THE HOME BUYERS PLAN:

With the federal government’s Home Buyers’ Plan (HBP), you can use up to $25,000 of your RRSP savings ($50,000 for a couple) to help finance your down payment on a home. To qualify, the RRSP funds you’re using must be on deposit for at least 90 days.

It’s worth mentioning that only you can make withdrawals from your RRSPs. Also, the home you purchase or build in Canada must become your primary residence before October 1st of the year following the RRSP withdrawal. Be careful if your project is a new construction as delays might jeopardize your strategy. The money you plan to use for the HBP has to have been deposited in the RRSP at least 90 days before making the withdrawal.

Repaying the amount you withdrew

Your repayment period starts the second year after the year you withdrew funds from your RRSP(s) for the HBP.

Generally, you have up to 15 years to repay to your RRSP(s), the amounts you withdrew from your RRSP(s), SPPs or PRPP under the HBP. However, you can repay the full amount into your RRSP(s), PRPP or SPP at any time.

Each year, the Canada Revenue Agency (CRA) will send you a Home Buyers’ Plan (HBP) statement of account, with your notice of assessment or notice of reassessment. The statement will include:

  • the amount you have repaid so far (including any additional payments and amounts you included on your income tax and benefit return because they were not repaid);
  • your remaining HBP balance; and
  • the amount you have to contribute to your RRSP(s), PRPP or SPP and designate as a repayment for the following year.

Repayments do not affect your RRSP deduction limit. You can still contribute to your RRSP(s) or PRPP and designate that amount as a repayment under the HBP, even if your RRSP deduction limit is zero.

If you do not make the annual repayment to your RRSP(s), PRPP or SPP, you have to include it as RRSP income on line 129 of your income tax and benefit return. The amount you include on line 129 is the minimum amount you have to repay as shown on your Home Buyers’ Plan (HBP) Statement of Account. Your HBP balance will be reduced accordingly.

SHOULD YOU TAKE ADVANTAGE OF THE HOME BUYERS PLAN?

It depends on many things, including:

  • Your age and saving ability / habits (your Money Personality)
  • The cost of the house
  • Are you better ahead renting or buying?
  • The amount of “other savings” you have saved for the house purchase
  • The cost of the house – will you have to involve Canada Mortgage and Housing and pay that insurance fee?
  • Will you qualify – having Next Step, your broker or your bank determine what amount of mortgage you would qualify for will help you make the decision
  • Have you completed a personal / family budget and taken into account the extra costs of home ownership (legal fees, moving costs, transfer fees, insurance, extra furniture and so many other costs?) Here is a valuable link to learn more.
  • How good is your credit rating – see our blog post on credit rating and credit score
  • You would be giving up the compounding of the investments in your RRSP – how will that affect your long term financial security? Even a small amount contributed annually becomes a large amount over time, as shown by the table below.
  • On your life goals- how important is home ownership?
  • Would owning your own home be more, or less stressful in your lives? This is a good topic for a money conversation – see the instructions for money conversations in the book “First comes Love, then comes Money”– A couple’s guide to financial communication: by Bethany and Scott Palmer

We would encourage you to come in and talk to us at Next Step Financial Solutions. There is no easy answer but there is advice you can count on when making the largest purchase of your life!

At Next Step – we create a safe place to talk about money!

www.nextstepfs.ca

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