Did you know that you can use your RRSP to buy a home? Buying a home can be quite overwhelming, especially if you have to move into locations with hiked house prices such as Toronto. Besides, saving enough money to purchase a house can also be challenging.
While most people opt for mortgages to pay for their homes, Canadians with Registered Retirement Savings Plans (RRSPs) can use their retirement savings as a down payment. That’s possible when they withdraw the savings through a Home Buyer’s Plan (HBP).
What’s a Home Buyer’s Plan (HBP?)
The Home Buyer’s Plan is a tax-deferred plan that allows Canadian homeowners to borrow up to CA$25,000 from their RRSP and use the money to purchase a new home. Notably, the government doesn’t impose taxes on RRSP funds used to buy a house.
If you are a couple, you can borrow up to $50,000 in total from your RRSP accounts. It is no doubt that this money is not enough to buy a house, but you can use it to pay for your home’s down payment. Withdrawals more than the limit may attract penalties.
Eligibility Requirements for Using a Home Buyer’s Plan
The Home Buyer’s Plan is only available for homeowners who have RRSP accounts. You must now meet the following requirements to use your RRSP for a home purchase.
- You must reside in Canada at the time of withdrawal until the time for purchasing the house
- You must buy the home before October of the following year after the HBP withdrawal
- The house you want should have no ownership for not more than 30 days before withdrawing money from your RRSP
- You must be a first-time homeowner. In other words, you must be buying your first home ever, or you last owned a home four years ago
- You must occupy the house as your principal residence for at least one year after purchasing it
When borrowing money from your RRSP account, you cannot use the home buyer’s plan to withdraw the funds you contributed during the last three months.
Using RRSP to Buy a Buy a Home: How the HBP Works
After meeting all the eligibility requirements for a Home Buyer’s Plan, you can trigger the withdrawals from your RRSP account by filling out Form T1036. You must fill out the form every time you request for RRSP money through the Home Buyer’s Plan.
Once you’ve withdrawn the funds from your RRSP and use it to fund your home purchase, you should return the money to your RRSP account within 15 years. You should pay back the money annually in instalments, depending on the amount you borrowed.
To find out the amount of money you should pay for a single installment, you should divide the total cash took from your RRSP by 15 years. That will help you determine the amount of money you should channel back to your RRSP account every year.
For instance, if you took out $24,000 from your RRSP for a house down payment, you’ll have to contribute at least $1,600 into the retirement account every year. One good thing about HBPs is that you don’t need to pay back the money with some interests.
When repaying the HBP funds, you should designate the funds as HBP repayments using schedule 7. You should do that every year when you are filing your income tax returns. If you fail to do that, the CRA will treat your payments as regular contributions.
Failure to channel back the annual payments into your RRSP will attract penalties. The CRA will add the unpaid balances to your taxable income and tax it accordingly. You can avoid that by making the payments on time and following the rules.
Advantages of Using Your RRSP to Buy a Home
In a nutshell, let’s look at some of the benefits of buying a home using an RRSP.
- Faster Home Buying: Borrowing money from your RRSP is the quickest way of purchasing a house. You can use the RRSP funds as a down payment instead of waiting longer to save some money for a down payment
- Tax-Free Loan: Instead of borrowing money from a private lender, you can borrow up to $25,000 from your RRSP tax-free. Most private lenders usually impose taxes on the loans they offer.
- Interest-Free: Whether you borrow home loans from a private lender or mortgage company, it’s no secret that you will pay back the money, including the interests. With the Home Buyer’s Plan, you only pay back what you borrowed.
- Save on Insurance: If your down payment is below 20 percent of the total value of the home you intend to buy, you’ll have to take out a mortgage default insurance. You can use your RRSP money as a down payment to avoid the insurance costs.
Disadvantages of using Your RRSP to Buy a Home
Like any other financial plan, the HBP also has a few drawbacks. Here are some of them.
- Reduces Retirement Savings: Taking out money from your RRSP reduces your savings for retirement. That may affect your savings potential significantly.
- It’s a Loan: Upon withdrawing funds from your RRSP, you need to repay it within 15 years. Failure to do that will attract penalties and taxes.
- Limited Withdrawals: You cannot withdraw more than $25,000 from your RRSP. With the rising costs of houses, that may not be enough for some down payments.
Buying a home using your retirement savings through a home buyer’s plan is a reliable way to get a new house. If you are planning to buy the Killarney beach houses for sale, Ballymore Homes can help you design your home, including kitchens and living rooms.
However, you should ensure that you have enough funds for the down payment and a few adjustments in your new home’s décor. Besides using RRSP to buy a home, you can save some cash for a down payment in a Tax-Free Savings Account (TFSA).