Saving for the down payment towards a mortgage can be a major process. This said, by utilizing the Canadian Home Buyers Plan, most first time (in some cases second time) home buyers can benefit by saving thousands in tax dollars.
Set up by the Government of Canada, the plan allows an individual to take up to $20,000 out of their RRSP to finance the purchase of their first home. The benefit is that YOU NEVER HAVE TO PAY TAX ON THAT MONEY. Traditionally, taxes must be paid when money is withdrawn from an RRSP (perhaps in retirement), but under the Homebuyers plan, this issue is completely avoided. If you are purchasing the home with a spouse, you can withdraw up to $20,000 each from your accounts tax free. In terms of repayment, you have up to 15 years to pay back your RRSP starting the second year after the year of withdrawal. At this time at least 1/15 of your borrowed amount must be paid back per year. There are a few more rules that must be considered:
- In terms of penalties, if you don’t repay at least 1/15 of the borrowed amount per year, you’ll have to add the amount as income and pay tax on it.
- You MUST purchase or build your home before Oct 1 after the year of withdrawal.
- RRSP contributions must be made 90 days before the withdrawal using the Home Buyers Plan.
Visit the Government of Canada Website for more information on the Home Buyers Plan: http://www.cra-arc.gc.ca/E/pub/tg/rc4135/rc4135-e.html
Some may argue that you’re missing out on growth of your RRSP if this plan is utilized. This said, I think that if you get a good price for your first home relative to others in the neighborhood, the appreciation of the home will hopefully make up for this. Also consider that you pay mortgage interest with after tax income. So if you pay 5.5% in mortgage interest per year and you are in a 40% tax bracket, you are effectively paying over 7.5% due to the effects of taxes.
Determining the right mortgage strategy that is custom to your situation is critical. The Home Buyers Plan is just one part of that strategy. Contact a knowledgeable and experienced mortgage professional to help you create a good mortgage plan, and then reap the rewards in thousands of dollars in savings over the years to come.
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