Borrow from yourself to buy first home
More than 100,000 Canadians use RRSP plan annually to finance their purchase
Sharon Adams
CanWest News Service
Thursday, February 15, 2007
After you've bought your home, wouldn't it be great if instead of paying a bank or mortgage company you could just pay yourself?
You can -- using your RRSP to finance buying your first home.
"It's a great way to borrow from yourself," says Robin Quelhas, senior manager of communications and sales for RBC Asset Management in Toronto.
Quelhas used the RRSP Home Buyers' Plan to finance a $20,000 down payment on a semi-detached home in Toronto five years ago.
"It's a no-tax event for the redeemer," says Quelhas, so long as the repayment schedule is maintained.
More than 100,000 Canadians use the RRSP Home Buyers' Plan each year to purchase their homes. Better than 1.5 million Canadians have used almost $16 billion of their RRSPs to buy homes between 1992, when the program started, and 2004, the most recent year for which Statistics Canada has crunched data.
It's a boon to first-time buyers in hot real estate markets, says Bob Dugan, chief economist with the Canadian Mortgage and Housing Corp. in Ottawa. A CMHC study of first-time buyers between 2001 and 2005 showed half of them used the program for their down payments, and for 40 per cent of them the HPB was the primary source of down payment funds.
"First-time buyers have certainly used RRSPs as the main source of their down payments -- they don't have equity from a previous home," he said.
Under the plan, RRSP holders can withdraw up to $20,000 from their RRSPs (that's a total of $40,000 for a married or common-law couple) for expenses in buying or building a qualifying home for themselves or a more accommodating home for a disabled family member.
However, it's a complex program with stringent rules. First-time home buyers might might consider seeking advice, Quelhas suggests. Rules governing the plan can be found at
www.cra-arc.gc.ca/tax/individuals/topics/rrsp/hbp/.
The program is limited to first-time buyers. If you marry someone who has used the plan and move into their home, you're no longer eligible.
However, you're considered a first-time buyer if you have owned a home in the past, but not within the last five years and you've repaid to your RRSP any funds previously withdrawn under the plan.
To prevent abuse, funds must have been in the RRSP for more than 90 days if you want to benefit from the tax break.
First-time buyers can withdraw the funds from their RRSPs without adding to their taxable income, but they must buy a qualifying home and repay the amount to their RRSP within 15 years, with repayment beginning the second calendar year after withdrawal.
Revenue Canada sends out a statement of account for the Home Buyers Plan with the annual income tax assessment notice starting the year repayment is to begin (although you can begin repayment earlier). Generally, annual repayment is calculated as one-fifteenth of the amount borrowed.
For younger first-time buyers, the sting of repayment can be somewhat relieved by increases in pay.
"As you're repaying, you're getting to a better fiscal position," says Quelhas, "so repayment gets easier over time."
He expects to repay his RRSP homebuyers loan in five years.
If you decide to make a balloon payment one year, it reduces your HBP balance and the annual payment the following year.
Repayment goes into your RRSP account, but is not counted as part of your contribution limit for the year. If you miss a payment, that amount will be added to your taxable income as RRSP income for the year. But don't miss a payment, because you lose the opportunity to replace the funds in your RRSP.
RRSPs can be used to buy traditional single-family homes, semi-detached homes, townhouses or condominiums, mobile homes, or a share in an equity cooperative.
But buyers -- especially of properties under construction -- need to be alert to details.
They need a written agreement to buy the property. It must be used as the principal place of residence and can't be owned for more than 30 days before the withdrawal of funds.
Closing dates are important as well. You have to buy or build the home before Oct. 1 of the year following the year of withdrawal. If you make the withdrawal late in the year, you may have as little as nine months to close the deal and register the deed.
If you're buying a home or condo yet to be built, you may run out of time. And if that happens, you might be liable for taxes on the amount withdrawn.
One down side to the plan is that buyers lose years of tax-deferred compound interest on their RRSPs.
However, "at the same time your home is probably appreciating, too," says Dugan. "And don't forget -- they're using pre-tax dollars" so buying takes a correspondingly smaller bite out of disposable income.
But most people who take advantage of the plan are young and have decades of retirement savings ahead of them. As well, with the HBP first-time home buyers can bump up the size of their down payment, thus reducing the size of their overall mortgage and monthly payments.
Like more than a million other Canadians, the HBP made buying a home easier for Quelhas. In years past, home buyers had to both save for retirement and save separately for a down payment. He was able to do both simultaneously.
© The Vancouver Sun 2007
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