Many Canadians set up RRSPs — the traditional approach — to save for retirement. In our industry, we help our clients use real estate as means of saving for a comfy retirement. If you have the former but not the latter, the Home Buyers Plan can help you to combine forces and ensure you can buy your first home and have your money really start working for you.
HOME BUYERS PLAN 2019 OVERVIEW
The Home Buyers Plan allows eligible first time buyers who have savings in their RRSPs to withdraw up to $35,000 towards a downpayment. Essentially, it is a tax-free, interest-free loan from yourself. This amount doubles to $70,000 if you’re buying with your partner or spouse, so long as they also qualify as a first time home buyer.
If you need a bit extra to afford your downpayment or are looking to increase your downpayment to lower your overall monthly mortgage payments, the Home Buyers Plan is a great solution for first time buyers.
However, as we discussed in our blog on the new first time home buyer incentives, the majority of individuals who fall in the first-time buyer age brackets — those 25 to 44 — are contributing less and less to their RRSPs. But if you’re one of the lucky few who have some savings, consider taking advantage of Canada’s Home Buyers Plan to get you your first home.
For those who have savings that isn’t in their RRSP, RBC had a great tip on how to earn an extra tax deduction from your own savings:
“If you have already saved $35,000 for a down payment and assuming you still had enough ‘contribution room’ in your RRSP for a contribution of that amount, you could move your savings into an RRSP at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers’ Plan. The advantage? Your $35,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home.”
As with any loan, even from yourself, you’ll eventually have to repay it. Let’s go over the rules for repayment and general eligibility.
HOME BUYERS PLAN ELIGIBILITY
In order to take advantage of the Home Buyers Plan you have to be a first time home buyer. To qualify as such you need to be a Canadian citizen and you mustn’t have owned any property within four calendar years of the purchase. This is referred to as the “Four Year Rule”.
The Four Year Rule means you haven’t lived in a home owed by you or your spouse within the previous four years. These same eligibility rules apply to all first-time buyer rebates.
Some other rules apply to be eligible to take advantage of the Home Buyers Plan which include:
- Buyers must plan to live in the home for one year minimum
- The home must be purchased or built within one year of withdrawal
- The funds in the RRSP must be there for at least 90 days prior to withdrawal *this Home Buyers Plan 90 Day Rule is why RBC’s tip above recommends putting your savings into your RRSP 90 days before closing.
HOME BUYERS PLAN REPAYMENT RULES
Repayment of your RRSP loan starts two years after withdrawal and you have 15 years to repay it in full. This means that each year you’ll need to pay 1/15th of the amount you borrowed.
This gives you two years to adjust to your new homeowner expenses, allowing you to prepare for when repayment begins. Ultimately, the repayment equates to $195 per month should you use the full $35,000 (or $2,333.33 per year). And remember, you’re paying back yourself.
Should you not be able to maintain the repayment schedule, you will end up paying tax on portions of the loan that aren’t paid back in time.
HOME BUYERS PLAN REQUEST FORM
To withdrawal the funds, you need to fill out a T1036 form, aka the Home Buyers Plan request form. You can find the form and the process of withdrawing the funds here.
You can use funds from your RRSP under the Home Buyers Plan for a downpayment or to help with closing costs, or both. Keep in mind, there are a few first time buyer rebates that already exist that help with your closing expenses, including the Land Transfer Tax rebate.
THE REAL GLORY OF USING THE HOME BUYERS PLAN
If you think that relying on your RRSPs to do all the work for your retirement is better than borrowing the funds briefly to buy into the real estate market, consider this:
On a $500,000 condo in Toronto, you can earn about 5% per year in equity. Mind you, those are conservative gains; Toronto’s condo market has been out-performing that for many years. Toronto’s average condo price went up 7.7% y-o-y in July and 5.1% y-o-y in June of this year alone.
So while you’re paying yourself back the $195 per month to your RRSP, you’re also earning approximately $2,083 per month in equity (or $25,000 per year on that $500K condo).
The point is, relying on your RRSPs to prepare you for retirement just isn’t enough. If you’ve got the funds saved, make the most of what you have and use them towards buying your first home. The equity gains are considerable and once you have your foot in the real estate door, you can start leveraging your home equity towards building a high-earning real estate portfolio. Learn more in our blog Stocks VS Real Estate to truly see how much more you can earn through real estate.