Now that the RRSP and tax seasons have passed, perhaps you’re thinking of purchasing a new home. If you’re a first-time buyer, did you know you can probably use those RRSPs to help buy or build a new home?
The federal government’s Home Buyers Plan is, according to the Canada Revenue Agency website, “a program that allows you to withdraw funds from your registered retirement savings plan to buy or build a qualifying home for yourself or for a related person with a disability.”
The CRA will allow you to withdraw up to $25,000 from your RRSPs with no penalties for that purpose, provided you pay the money back over time.
“It’s a great option for those who have the RRSPs to draw from, says mortgage specialist Brandee McWhinney, from Dominion Lending Centres. “It’s become extremely common [for people to use this program]. I would say it’s one of the top two sources for down payments today, the first being family gifts.”
The mechanics of the program are fairly straightforward. According to the CRA, you can request the funds from the holder of your RRSPs, and you need to give assurances that you, or the family member who has a disability, will occupy the home; that you are a first-time buyer; and that you have entered into a written agreement for either a purchase or a contract to build. You must also be a resident of Canada. There are other details, which can be found by searching Home Buyers Plan on the CRA website (www.cra-arc.gc.ca).
McWhinney thinks the main reason the HBP program is so popular is that it’s very difficult to come up with a down payment these days because the required dollar amount is so large.
“It may only be five per cent [needed for the down payment], but in actual dollars, it’s quite a bit because home prices are so high.”
There are a few things to watch out for if you plan to use the program, says McWhinney.
First off, the money must have been invested in RRSPs for at least 90 days before it can be used. Also, the RRSP generally can’t be locked in or part of a group RRSP.
One interesting aspect of the program is that although it is aimed at first-time homebuyers, the CRA definition of a first-time buyer is someone who hasn’t owned a home and occupied it as their personal place of residence during the preceding four years. This means that if you’ve been renting for the past four years, you qualify.
Another point to keep in mind, says McWhinney, is that if you’re planning to go down this road, you must give the holder of your RRSPs time to cash them out. In other words, don’t make it a last minute thing because such institutions can often take three or four days to get you your money.
Greg Andrews, a charted accountant with MNP, concurs that the HBP has become popular for down payments, and for good reason.
“I see it fairly regularly [on people’s tax forms], so obviously it’s pretty common,” he says.
From his perspective, the program can be a good deal – provided those using it understand the trade-off that occurs when using RRSPs as a down payment.
Naturally, while the money is tied up in the home, it’s not earning as part of one’s overall RRSP portfolio, but Andrews says the offsetting savings in terms of not paying interest on borrowed money can often mean an overall win for the homebuyer.
He points out that it’s important to realize that the money must be paid back according to the borrowing schedule. Otherwise, it gets added to your income for the years you don’t keep the repayments up, which is generally not a good thing for most individuals.
“People need to determine before they go ahead what the overall financial impact will be on them,” he adds.
“That said, I definitely let people know about the option because it’s a good one.”
• For all the details on the Home Buyers Plan, consult the CRA website.
Robert Prince is a freelance writer in Maple Ridge.