Check out the information piece below on the First Time Home Buyers Plan. For those individuals looking to buy their first home with some RRSP savings, this is a great way to access some interest free money! I have been running into a number of individuals that have taken advantage of the FTHB Plan but did not fully grasp what they were getting into. The key is that you have to make those annual contributions back into the plan for 1/15th the borrowed amount. The amount you are able to access increased to $25,000 this year which is great. If utilized properly this strategy can make a big difference in the amount of money needed to be borrowed…..for some it is the difference between being able to afford the downpayment for their first home.
The Federal Government’s HOME BUYERS PLAN introduced in February 1992 allows first time buyers to access their RRSP savings for use towards a down payment on a home. If you have not owned a home during the past 5 years, you qualify as a first time buyer. Homebuyers are allowed to use up to
$ 25,000 of their RRSP funds (couples a combined $ 50,000) for use on a downpayment on either a new or existing home. Monies need to be in the plan for only 90 days.
Many first time buyers have taken advantage of the program. No taxes are incurred on RRSP funds withdrawn under the Home Buyers Plan – provided that the funds are paid back to the RRSP on schedule (in installments over a 15 year period). If payments are not made as scheduled, the unpaid amount is treated as taxable income in that year. Moreover, the missed amount cannot be put back into an RRSP at any point in the future. Failure to make a payment, therefore, not only incurs taxes, at the participant’s marginal tax rate, on the missed amount, but income is also lost from the amount not being paid back into the RRSP, earning tax free interest.
Yet despite the obvious financial disadvantages of not paying back their RRSPs on schedule, many Home Buyers’ Plan participants are failing to do so.
The Home Buyers’ Plan CAN work to the financial advantage of first time buyers – but only if it is fully understood and used properly. An analysis conducted by Clayton Research in 1992 for the Canadian Home Builders’ Association showed that this means using the RRSP funds to reduce the size of the initial mortgage (and not to purchase a more expensive home than they could have otherwise afforded).Using the savings on a smaller mortgage to pay down the mortgage faster and/or to contribute more to an RRSP (but not to increase current consumption). And it certainly means making sure that the RRSP funds are repaid as required or in a lump sum.