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In today’s economic climate, soaring house prices and stagnating incomes can make it particularly challenging for first-time homebuyers to accumulate the necessary down payment for their dream home.
Enter the Federal Government’s First-Time Home Buyers Plan (FTHBP). This program enables you to tap into your Registered Retirement Savings Plan (RRSP) and withdraw funds tax-free to finance your initial home purchase.
It’s important to note that the funds withdrawn under this scheme must be repaid to your RRSP account within a 15-year timeframe.
This guide provides comprehensive details about the First-Time Home Buyer Plan, helping you navigate this advantageous program effectively.
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The First-Time Home Buyer Plan (HBP) is a federal government initiative allowing eligible Canadians to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) for a down payment on their first home. If you’re purchasing the home as a couple, the limit doubles to $70,000.
The funds must have been in your RRSP account for at least 90 days to be eligible for this program. Additionally, you must have a signed agreement to buy or build a home that meets the program’s qualifications.
A “qualifying home” under this program can be a newly constructed or existing residence located in Canada. Eligible property types include single-family homes, semi-detached houses, townhouses, mobile homes, condominiums, and apartments in duplexes, triplexes, or fourplexes.
One of the program’s key benefits is that the withdrawal is tax-free, provided you repay the amount within 15 years. The minimum annual repayment is one-fifteenth of the total amount you withdrew.
For instance, if you withdrew $35,000 from your RRSP account, you would be required to repay a minimum of $2,333.33 to your RRSP each year.
To calculate this:
1/15 * $35,000.00 = $2,333.33
The First-Time Home Buyers’ Plan is not applicable for purchasing a rental property, second home, or vacation residence.
To be eligible, the home must serve as your principal residence or be intended for someone related to you with a disability. Additionally, the home must be occupied within one year of acquisition or construction.
To initiate a withdrawal from your Registered Retirement Savings Plan (RRSP) under the HBP, you must complete and submit Form T1036 to the financial institution or brokerage that manages your RRSP. This form informs them of your intention to utilize funds under the HBP and specifies the amount you wish to withdraw.
You can make multiple withdrawals within a year if the total amount is within the established limits of $35,000 for individuals or $70,000 for couples.
The payback period for the withdrawn funds is 15 years, with the first year after purchasing your home serving as a grace period. Repayments begin in the second year of ownership.
The full balance becomes due if you sell the house or cease to occupy it as your primary residence.
You are deemed a first-time homebuyer if neither you, your spouse, nor your common-law partner has owned a home in the past four years.
Additionally, you may still qualify for the plan if you are a person with a disability or are assisting a family member with a disability in purchasing or building a home.
Investing in an RRSP offers numerous tax benefits aimed at encouraging retirement savings. For instance, income earned in your RRSP isn’t taxed until withdrawal. The HBP allows you to tap into this account for a first home purchase without incurring tax penalties, thereby enhancing your purchasing power.
For example, let’s say your dream home costs $750,000. With a strong credit score, verifiable income, and a good credit history, you would need a minimum down payment of $50,000.
By utilizing $35,000 from your RRSP under the HBP, you would only need an additional $15,000 to meet this requirement. Note that this does not include closing costs.
Even if you possess sufficient funds from other sources for the down payment, using your RRSP funds can still reduce your overall mortgage loan and possibly your mortgage default insurance premium.
A larger loan amount will increase both your interest expenses and default insurance premiums. Reducing these costs using tax-free money from your RRSP via the HBP is advantageous.
Remember that mortgage default insurance is typically required when the down payment is less than 20% of the home’s value.
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Before you can utilize the First-Time Homebuyer Plan, you need to meet certain criteria:
Yes, using the HBP without a fully funded RRSP is possible, but the process can be complex. You would need to secure an RRSP loan from a financial institution. After holding the loan in your RRSP account for 90 days, you can then withdraw the funds under the HBP to help buy your first home.
Note that in this scenario, you’ll have two loans to repay: the RRSP loan and the funds you withdrew under the HBP. Therefore, it’s crucial to carefully consider the financial implications before taking this route.
On the upside, you’ll receive a tax receipt for the RRSP contribution, which could help offset your taxes the following year.
The HBP cannot be used to purchase a second property if you own a home. However, you may become eligible for the program again four years after transferring the title of your existing home, provided you have fully repaid any outstanding HBP balance.