First Time Home Buyers Plan
The following is a strategy to use the Federal Government RRSP Tax Rebate to subsidize a down payment on the purchase of a home.
Before we start you should first visit the Government of Canada website; and see if you qualify as a first time home buyer. I can help you with the basics but you need to do your homework and verify it with the source.
In order for this particular strategy to work you need the following:
1) You need to be a salaried employee, who gets T4’d and has income tax deducted from your paycheque consistently and equitably throughout the year. Why? Because if you aren’t paying income tax there won’t be a tax rebate coming to you after you file.
2) You can only contribute the amount of your allowable RRSP contribution limit or $25K, whichever is less. Technically you can contribute as much as you want but you won’t get a tax refund on anything above your allowable limit, and the maximum tax free withdrawal for “first time home buyers” is $25K per borrower. Minimum down payment is 5% of the purchase price, so you don’t have to contribute and withdraw the maximum of $25K if the home you want sells below $500K.
This is how it works:
Option 1 – let’s say your down payment is going to be $15K and you have that money saved but not in RRSPs.
You deposit your $15K into an RRSP eligible fund with the intention of withdrawing it when you need it. The requirement here is that the funds have to remain within the RRSP for at least 90 days before you take them out. It is important that your investment people know exactly what you are doing so the funds will be available after the 90 days.
Where is the benefit?
When you file your income tax you will include the $15K RRSP contribution and if you have been paying the correct amount of tax throughout the year, you will see a rebate of about $5K. Typically you would get back 1/3 of your RRSP contribution.
What’s the catch?
The catch is that you are expected to pay the $15K back to your RRSP, however you get 15 years to do it, it’s interest free, and if one year you don’t get around to it you only pay tax on that one year’s repayment.
What does the repayment look like?
The repayment schedule for the RRSP (Rev Canada) arrives approximately 13 – 15 months after you have moved in to your new home. Those payments are broken down over a time frame of up to 15 years and that is a payment of only $1K per year (remember its interest free).
Option 2 – let’s keep the down payment the same at $15K but this time you don’t have the full amount saved. Suppose you only have $5K saved what about the other $10K? You get an RRSP loan. Why? It is an alternative when you don’t have the cash sitting in the bank.
RRSP loan $10K and your tax rebate now about $3,300. You make monthly payments on the loan at a reasonable interest rate and when you get your tax rebate you use that to pay down your RRSP loan. Most institutions won’t allow you to withdraw the full $10K until your loan is completely paid off, however I have worked out an agreement which will allow you to do so if your rebate goes to the loan. Secondly paying down your loan as quickly as possible improves your credit.
What’s the catch?
The loan will be a liability as long as you are making payments and there is always more expense involved when borrowing money but the benefits outweigh the small amount of interest you will pay.
This is a sweet deal which enables you to take advantage of free government money to use towards your home purchase. This applies to First Time Home Buyers, and those who have been renting since prior to Jan 1, 2008. The RRSPs are loaned to you interest free, and once they are repaid they are yours. $15K is a minimum down payment for a $300K purchase and you are allowed to withdraw up to $25K each in RRSPs for the purchase of a home.
I have established the connections necessary with people I trust to put this strategy to work and it has been highly successful in helping new home buyers over the last few years. Please note, credit worthiness is taken into consideration when qualifying for the loan and obtaining the best interest rate. The time is now because the sooner you get started the sooner you will have your down payment saved.
Perhaps you have heard a friend, family member or co-worker talking about buying a home. If so they won’t want to miss out on this opportunity, even if they have a down payment saved.
Written by David Iverson Mortgage Broker
White House Mortgages
107 – 1980 Cooper Rd Kelowna BC V1Y 8K5