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the amount withdrawn.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
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.
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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.
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.
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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