Using
Your RRSP- "Home Buyers Plan"
The
Federal Home Buyers Plan allows first time
home buyers to withdraw up to $20,000 from
their RRSP for the purpose of buying or
building a qualifying home. The primary
benefits are that the RRSP issuer will not
withhold tax on the amount nor will you
have to claim the amount as income. The
amount must be repaid to the RRSP within
15 years with a minimum annual payment of
1/15th of the amount withdrawn. If a repayment
is not made for a given year the minimum
repayment is included as taxable income
for that year.
Participation
To participate you have to withdraw the
amount from your RRSP using form T1036 Applying
To Withdraw An Amount Under The Home Buyers
Plan. Give the completed form to the RRSP
issuer along with the certification that
you meet or intend to meet certain conditions
as follows:
Conditions
-
You
have to make your withdrawal request
in the same year you wish to participate
in the Home Buyers Plan
-
You
cannot have previously participated
in the plan in previous years.
-
You
have to be a resident of Canada
-
You
have to enter into a written agreement
to buy or build a qualifying home
-
You
can withdraw a total of $20,000. Multiple
withdrawals are allowed. Each of you
and your Spouse can participate in the
Plan and withdraw $20,000 from your
own RRSPs.
-
You
have to be considered a First Time Home
Buyer
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A qualifying home is a housing unit located
in Canada. Existing homes and homes under
construction are both qualifying homes and
can be either:
-
Single Detached Family Homes
-
Semi
Detached
-
Town
Home
-
Mobile
Home
-
Condominium
Unit
-
Apartment
in a Duplex, Triplex, Four-plex or apartment
building.
-
A
Share in a Cooperative Housing Corporation,
provided the share entitles you to posses,
and gives an equity stake in, a housing
unit.
First Time Home Buyer
You are considered a first time home buyer
if you have not owned a home while you occupied
it as your principal place of residence
for five years. At any time in the fifth
calendar year since you last owned a home
you can qualify.
Recent
Improvements
The
1998 budget now allows Canadians to use
the homebuyers plan again. The applicant
must have no outstanding balance on any
previous Home Buyer Plan loans and must
re-qualify for the program again. This means
the home owner must re-qualify as a first
time home buyer by not owning for the prescribed
period. The effective date of the changes
is 1999.
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Should You Take Money Out of Your RRSP
For A Home Purchase?
Withdrawing
$20,000 from your RRSP under the "Home
Buyers Plan" can be viewed as a loan
from your RRSP to yourself. Some call this
a zero interest loan but of course the actual
cost of the loan is exactly what the funds
would have earned if they had remained in
your RRSP. You will forego these earning
if you take the funds out and use them for
a down payment. On the other hand if you
don't withdraw these funds you will be forced
to borrow the required down payment.
Lets
assume you have $20,000 in your RRSP at
an average annual rate of return over the
next 15 years of, say 8%. In 15 years your
$20,000 will have grown to $63,443, an increase
of $43,443. As such if you withdraw these
funds under The Home Buyers Plan, while
you won't suffer taxes, you will forego
these earnings.
Most
financial advisors will counsel you to borrow
to invest in your RRSP because the "overall"
rate of return from your RRSP is greater
than the cost of borrowing the money. The
cost of borrowing $20,000 in a catch up
loan over 15 years is usually in the neighborhood
of Prime, plus or minus a percentage point,
depending on the risk of the RRSP investment.
Assume a cost of 7.5% over the 15 year amortization
of the loan. The interest paid to borrow
$20,000 would be $13,372. If we also assume
a 35% tax rate, you would have to earn $20,572
of gross income in order to net out these
interest costs.
We
can now compare the before tax cost of borrowing
- around $20,572 - with the before tax return
this $20,000 would earn in your RRSP - around
$43,443. Clearly it makes sense to borrow
to invest in your RRSP. Conversely, it should
also make sense to leave the money in your
RRSP and borrow your down payment, one being
the same as the other.
In
reality, no mortgage lender will finance
100% of your purchase price. In addition,
your lender will qualify you for a larger
mortgage, based on gross income, if your
debts are lower and don't include a large
personal loan for the down payment. A personal
loan or second mortgage is a debt that squeezes
the maximum mortgage amount you will qualify
for if it puts you above the lenders target
debt service ratios.
In
addition withdrawal under the Home Buyers
Plan may be more cost effective than borrowing
if this borrowing cost also includes a CMHC
fee. This fee can dramatically push up your
effective interest rate. If you're just
shy of a conventional down payment of 25%
it may be wise to withdraw the remainder
from your RRSP to avoid paying mortgage
insurance fees.
The
best approach is to withdraw from your RRSP
under the Home Buyers Plan, get all the
financing you qualify for, and then once
the mortgage is funded borrow to replenish
the RRSP if you can afford the payments.
Remember you'll also have to pay back your
RRSP 1/15th each year.
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Tips
Pay back the minimum 1/15th required each
year if you borrow through the home buyers
plan. Repayments do not trigger another
tax savings. All savings above the minimum
1/15th repayment should be designated 'contributions
', rather than repayments, and invested
into your RRSP. You'll receive the tax savings
on these amounts each year.
Always
invest as much as you can in your RRSP,
even if you have to borrow, but be sure
you can afford to carry the loan.
Withdraw
the money from your RRSP only if you have
no other source of non RRSP savings.
Saving
Your Down Payment Using your RRSP
To
accumulate $20,000 in a non RRSP savings
plan, assuming an 8% return and a marginal
tax rate of 35%, you would have to invest
$3,605 each year for the next five years.
This would mean earning $5,546 in gross
income each year in order to net out this
$3,600 in after tax savings.
Rather
than spending this $5,546 in gross income
each year on a non RRSP investment, you
could invest this same amount into your
RRSP. With yearly RRSP contributions of
$5,546, you will accumulate about $32,536
in five years. You will also receive tax
savings each year in the amount of $1,941.
Another way to look at it is that you could
accumulate the required $20,000 down payment
in about 3 1/3 years by choosing the RRSP
savings approach. IT ALWAYS MAKES SENSE
to save through an RRSP, whether the savings
will be for a house or retirement.
Other
Plans
Tax-Free
RRSP Withdrawals for Lifelong Learning
Canadians
will be eligible to make tax-free withdrawals
from their RRSPs to support lifelong learning.
Individuals will be able to withdraw tax
free up to $10,000 per year from their RRSPs,
with a maximum of $20,000 over a four-year
period. To preserve retirement incomes,
these withdrawals will be repayable over
10 years.
More
tips:
What
if I want to sell my home before I have
paid off the RRSP loan?
You do not have to repay the remaining balance
if you sell your home before your scheduled
payments are complete. And you are not required
to continue to own the home until the amount
borrowed is repaid.
In
some situations, outstanding repayment installments
have to be reported as income by the borrower:
When
you leave the country. If a taxpayer
ceases to be a resident of Canada, "the
balance of withdrawals made under the plan
and not yet repaid must be repaid within
60 days of ceasing residency, or must be
included in the individual's income for
that year."
If
you die. When an individual dies with
an outstanding Home Buyer's Plan repayment
balance, "the outstanding amount must
be included in the deceased's income for
the year. There is an election that may
be made in certain circumstances to allow
a spouse of the deceased to effectively
take over the deceased's obligations with
respect to repayment installments."
When
your RRSP matures. If you have an outstanding
Home Buyer's Plan repayment balance at the
end of the year in which you turn 69 - the
deadline for collapsing an RRSP - this outstanding
amount must be repaid before year end or
be reported as income on your tax return.
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