Interest rates are going up, mortgage rules have changed and house prices in some parts of the country don’t seem to be going down – yet. This may not look good for first time homebuyers who may find they can’t afford to buy that dream house – yet. But it’s not all gloomy. There are still areas of the country where prices have remained steady; and if all goes the way the government indicates, prices may start coming down in 2018.
First timers should still be looking at their options.
Usually the biggest obstacle for first time home buyers is coming up with the down payment. In 2017 the average down payment for first time home buyers was 26%. Sources included:
- Loans, gifts from parents and/or other family members (accounted for 18% of down payments)
- RRSP withdrawals (accounted for 7% of down payments)
- Own savings (accounted for 54% of down payments)
- Loan from a financial institution (accounted for 19% of down payments)
With the new rules introduced over the past year and the fact that we’re now in RRSP season, it’s a good time to look at the Government of Canada’s Home Buyers' Plan for first-time home buyers, which allows them to withdraw up to $25,000 from their RRSP, without a penalty. If you are married or purchasing the property with another first-time home buyer, each of you may withdraw the maximum each for a total of $50,000.
Once you decide to use your RRSPs then there are a few rules.
What’s the definition of a first-time home buyer?
You are considered a first-time home buyer if, in a four-year period, you have not occupied a home that you or your common-law partner or spouse owned. Even if you or your spouse or common-law partner have previously owned a home, you may still be considered a first-time home buyer.
The four-year period begins on January 1st of the fourth year before the year you withdraw the funds and ends 31 days before the date you withdraw the funds. For example, if you withdraw funds on March 31, 2018, the four-year period began on January 1, 2014 and ends on February 28, 2018.
If you don’t fit that four-year window yet, you could wait and buy later. For example, if you sold your home in 2013, and did not purchase another one until 2018, you can participate as a first-time home buyer.
Also, buyers must have a bona fide purchase agreement for a house that will be owner-occupied.
What’s a qualifying home?
No rentals or investment properties. You must have either bought or built the home before October 1st of the year, after the year of withdrawal. And you can buy or build the home alone or with others. When purchasing with others, the benefit applies to the entire purchase even if only one person qualifies as a first-time home buyer.
Paying it back
RRSP withdrawals must be paid back within 15 years so each year 1/15 must go back into the fund. If not, then that amount will be taxable. For example, if you withdraw $25,000 from your RRSP then you must pay back $1,667 every year for 15.
However, it’s not straightforward – you must designate the amount as a payback for the Home Buyer’s loan.
RRSP withdrawal conditions
- You have to be a resident of Canada at the time of withdrawal
- You have to receive all withdrawals in the same calendar year
- You can only withdraw up to $25,000
- No tax will be withheld
- You cannot withdraw from an RRSP that is locked in
- Your RRSP contributions must be in the account for 90 days before withdrawal
- You must fill out a form to withdraw funds, which can be found at the Government of Canada website
You may want to consider borrowing to deposit into an RRSP this tax season which, after 90 days, can be used as a down payment. There might also be a tax benefit for you.
You can use your RRSPs as a down payment more than once as long as the balance from the first withdrawal has been paid back in full.
To keep track of your account, each year you will get a statement with your Notice of Assessment showing what you owe and how much contribution you have in your RRSP.
This might be a better way to save for your down payment. It is, however, a longer-term strategy. There isn’t a lot of room to save, the maximum is $5,500 each year, but your money grows tax free. When you hit your target, you can withdraw the money with no strings attached.
For more information about the Home Buyer’s Plan and to develop a plan for your down payment, contact your mortgage professional. He or she has the tools and the expertise to help you realize your dream of home ownership.