Why First Time Home Buyers should Leverage their RRSP and the Home Buyer Plan

I often hear from people that they want to save for a down payment before they think about buying their first home, but in the meantime prices are going up on values faster than they can save.

I always recommend getting an RRSP and using the Home Buyer Plan (HBP) to them, but not just strictly as a saving tool. There are a lot of ways that this can be beneficial.

While people often say they don't have the money to save for their RRSP or down payment, consider making automatic deductions. Each payday pay your RRSP $25 or $50 or try doing direct transfers from your bank account by "rounding off" your bank balance a few dollars each week. You will be surprised how fast it adds up and how little you miss it. You can also ask your employer to offset this by lowering your tax deductions at source to account for the higher refund you will receive, so often this works out to the same or similar "take home" amount.

Firstly, the contributions to the RRSP are tax deductible. So while you are saving up for your own home, you will get a tax break in the form of a higher refund or lower tax bill. This can be from 20% up to 40% of what you are putting into the RRSP coming back as a tax refund. Often the strategy ends here, once enough is saved the RRSP holder takes the money (up to $25,000 per spouse) out under the Home Buyer Plan and uses it as their down payment. Under the HBP you can take out money out of the RRSP without it being considered income or losing your tax breaks so long as you put it back in an RRSP over 15 years.

However, there are other ways to leverage that RRSP to help you buy your first home. The money can be used for anything, not just a down payment. The only requirements for taking it out are that you:
- are purchasing a home you intend to live in within a year of purchase
- you haven't owned another home in the past 5 years or have a balance owing to the HBP already
- The money has to be in for at least 90 days before the withdrawal
- you must make the withdrawal within 30 days of the purchase and if multiple withdrawals, they have to be in the same year
- you agree to repay the withdrawal over 15 years (with a 2 year reprieve before you starts) into your own RRSP, but if you can't make that payment you pay tax on the payment you should have made to offset the original tax break you received. (Note: in a year you have little or no income, you can basically skip it with no tax consequences).

Sometimes, using the HBP money in other ways can help make the purchase a reality, for instance letting your mortgage broker know you will use the withdrawal to pay down existing debts, instead of entirely as a down payment, may help you qualify for a mortgage or higher amount that you may not have qualified for due to "Debt Service Ratios" as these are used to determine how much of your income goes to debt. Even if you have only a few payments left to go paying down a debt, this can be held against you in qualifying for a mortgage. One client did this as we suggested and qualified for a mortgage of $80,000 higher. Making it possible to find a home available in the approved range that wouldn't have been previously possible. Often people take all the cash they have to pay down debt to try and improve debt service ratios, but recycling it through the RRSP first gets them the tax refund and the money to pay down debt in order to make that money go much further.

Another idea is that if you have a lump sum you are planning to use for your down payment or can "borrow" for 90 days somehow, put in the RRSP before using it to buy the property. This will allow you to get both a tax break and a nice size tax refund as well. Therefore getting more "bang for your buck" with the same money. Putting your down payment fund in the RRSP first may give you enough money to qualify for a larger mortgage, or provide you with money for closing costs, moving expenses, and incidentals like renovations or furniture.

Sometimes using this strategy makes the difference between making it work to buy your home or not. People are frequently disappointed that they can't qualify for quite enough money, when doing this can make it work. Mortgage brokers try to be helpful but aren't always knowledgeable about RRSP's options that might help or that sometimes less down payment and paying down the debts can be the key, even if they are small ones.

Keep in mind that as a first time home buyer you will also qualify for the First Time Home Buyer Credit which gives taxpayers a $5000 non-refundable tax credit in the year they buy their first home. This translates into a $750 extra refund.

Feel free to contact us at service@painfreetaxes.ca for free tax planning around buying your new home or leveraging your down payment in the best possible way. You might be surprised how using these strategies can make your dream of owning your own home a reality faster, or leave you with a little less cash crunch in the process.

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