Let's face it, saving money for the down payment on your first home can be an overwhelming task. These days, you are required to put down a minimum of 5% of the purchase price of your first home, the minimum that mortgage insurers CMHC or Genworth will allow.
If you are looking at buying a home for $300,000, you will need a minimum down payment of $15,000. Buying a home for $500,000? You will need a minimum down payment of $25,000, and so on.
When I meet with first time home buyers, more often than not we have a thorough discussion around the federal Home Buyers Plan. There seems to be a few misconceptions out there when it comes to the details of the plan and how it actually works. The Home Buyers Plan is an excellent way to get a "boost" from your current savings or to help you get started saving towards your down payment.
What is the Home Buyers Plan? It is a government program that lets you withdraw money from your RRSP savings (even if you don't have any), towards the down payment on your first home, tax free and without paying a penalty. You can also use the Home Buyers Plan to help a relative with a disability buy a home.
If you fall into either of the following scenarios, you may be able to take advantage of the Home Buyers Plan and benefit from significant tax breaks:
- You do not have enough money for a down payment, but have money in a Registered Retirement Savings Plan (RRSP).
- You have money for a down payment and have unused RRSP contribution room.
How does the Home Buyers Plan work ?
- If you fit into the first scenario above, you and your spouse or common law partner, can each withdraw up to $25,000 from your RRSP's to help build or buy the same first home for a combined total of $50,000.
- If the second scenario is more like your current situation, consider contributing the money you have saved into an RRSP and potentially benefit from a substantial tax refund. The contribution must be within your RRSP contribution limit, which can be found on your most recent Notice of Assessment from the Canada Revenue Agency.
Let's look at an example of how to use the Home Buyers Plan to your advantage. We will assume RRSP contribution room of $25,000 each and a 35% tax bracket for you and your partner, assuming you are both eligible for a tax refund and you've saved $50,000 for a down payment on a first home.
STEP 1 - Use your savings to each contribute $25,000 to your RRSP's. (These contributions must be made prior to March 1, 2011 in order to claim them on your 2010 tax returns).
STEP 2 - File your 2010 tax returns as soon as possible and claim your respective RRSP contributions.
STEP 3 - Based on a 35% tax bracket and $25,000 each in contributions, you and your partner could receive income tax refunds of up to $8,750 each, for a total of $17,500.
STEP 4 - 90 days after making your contribution, withdraw your RRSP funds through the Home Buyers Plan program.
Now you and your partner have $67,500 ($17,500 tax refund + $50,000 Home Buyers Plan withdrawal) to use towards the down payment on your first home !
It is important to remember that funds must be in your RRSP for at least 90 days, prior to being withdrawn under the Home Buyers Plan. Also, any amount you withdraw under the Home Buyers Plan must be repaid to your RRSP. Repayments must begin in the second year after the withdrawal and the full amount must be paid back within 15 years - full details can be found at the Canada Revenue Agency's website.
Every year you will receive a Home Buyers Plan account statement, with your Notice of Assessment. The statement will show in detail, the amount you withdrew under the plan, any repayments you've made, the outstanding balance and the minimum amount you must repay the following year.
As you can see, the Home Buyers Plan is a simple way to get the most from your savings and get you in your first home sooner rather than later.
Jesse Merson is a Mortgage Advisor with BMO Financial Group in Toronto. He specializes in all facets of residential financing - mortgage preapprovals, purchase financing and existing home refinancing. Email Jesse
