Buying your first home can be a whirlwind for many people. There is a lot to consider, from down payments, to mortgages, to loans, and you’re probably learning all this for the first time. Saving up for a good down payment can seem like an insurmountable feat. But having a large down payment can get you better mortgage rates, and save you lots of money in the long run. The good news is that the Federal Government has programs for first time home buyers to make the process a little easier. The First Time Home Buyer’s Plan (HBP) allows individuals to use their RRSPs to make a tax free down payment on their first house. Here’s how it works.
How to Qualify
There are a few qualifying factors that make you eligible for the HBP. First, you must be a Canadian resident and you must not have owned a home in the last 4 years. If you are buying a home with a spouse or common law partner who has owned a home in the last 4 years, you can’t have lived in their home in that time frame. You must have a written agreement to buy or build a home, and plan to live there as your primary residence within a year of purchase. You can still qualify if you have used the HBP before, you can’t have any outstanding balance with a previous plan. Finally, the money borrowed from your RRSP must be in the account at least 90 days before withdrawal, and that withdrawal must be made within 30 days of taking the title of your home.
What You Get
The HBP allows you to withdrawal up to $25,000 tax-free from you RRSP. If you buying the home with a qualifying partner, you can both withdrawal up to $25,000 for a total of $50,000. Even if your partner doesn’t qualify, you are still entitled to the original $25,000.
This withdrawal from your RRSP is considered a loan, so it must be paid back within a 15 year period. Your first payment does not need to be made until 2 years after you purchase the home, and payments are made annually. The minimum payments are simply the total amount withdrawn from your RRSP divided by the 13 years left on your repayment plan. Making less than the minimum payment means that the difference in amount between the annual payment and the amount paid must be claimed as taxable income. For example, if your minimum payment is $1,500 and you paid $1,000, the remaining $500 is taxable income. If you pay more than the minimum, your minimum annual payments are recalculated to reflect the new amount owing.
Is the Home Buyer’s Plan Right for Me?
If you’re buying your first home, the HBP can be a great resource for helping you make a solid down payment. This can make a overall difference in your mortgage and long term payment plans with the home. The important thing to remember is that the money is considered a loan, and failing to pay it will cost you more headache than it might be worth. But it can be an incredibly valuable tool to help you start building equity early on in life. As with any financial decision, we recommend that you discuss this with a mortgage broker. They’ll help you understand the implications and considerations. But as long as you can make the minimum payments, the HBP is a great tax free option for new homeowners.