A valuable incentive that home buyers can take advantage of is the Government’s Home Buyers’ Plan (HBP). In my experience, however, there is some confusion surrounding this program, and so I’d like to take this opportunity to provide you with a clear, simple overview.
The HBP allows would-be home buyers the opportunity to withdraw up to $25,000 from their RRSP without incurring any withholding or income tax, and use it towards a home. The amount withdrawn then needs to be paid back into an RRSP over a 15 year period, with equal amounts due each year (i.e. 1/15th).
However, not all homes qualify for the HCP program. The home must be in Canada, it must be a principal place of residence, and it must be purchased or built by October 1st of the year following the withdrawal. So for example, if $25,000 is withdrawn on January 1, 2011, home buyers have until October 1, 2012 to it towards the home.
Now, there are some key things to keep in mind about the HBP, and this is where some people get a little confused – because there’s a lot of misinformation floating around out there. Let me focus on these key considerations one at a time:
- To participate in the program, you must not have owned a home in the previous 5 years. This is important, because some people think that the HBP is only for first time home buyers. That’s not correct. While most HBP participants are first-time home buyers, not all of them are – you just need to not have owned a home for the past 5 years.
- You don’t have to withdraw the maximum $25,000 from your RRSP. Yes, most people do (since a lower mortgage is always a good thing), but, again, you don’t have to. You can withdraw any amount up to $25,000.
- When you withdraw any funds from your RRSP, it stops bearing interest. So keep this in mind when you think of the long-term financial implications of this strategy.
- If you repay less than 1/15th of the amount withdrawn per year, the difference is automatically categorized by the government as income – so you’ll have to pay taxes when you file.
- The amount that you repay isn’t considered a new contribution to your RRSP, and so you don’t get any tax deductions on them. For example, if you withdraw $25,000, you’ll pay back $1666.66 per year – but when you do, you can’t deduct that $1666.66 as an RRSP contribution. According to the government, you already received the tax deduction when the initial amount was invested (however many years ago).
To learn (even) more about the HBP, visit the Government’s website by clicking here.
Confused about Financing your New Home?
Buying a home – especially a first home – can be a fun, but somewhat daunting experience. You don’t want to make any mistakes, because the financial consequences can haunt you for years.
I’ve had the privilege of helping numerous home buyers (and many, many first timers) get the guidance, support and honest answers they need. And I don’t rest until my valued clients are empowered to make wise decisions that fit their current and long term vision.
I would be honoured to help you as well, even if you’re not actively looking to buy a house, but simply want some straightforward “jargon-free” answers about mortgages, your options, and other key home buying issues. Call me at 780-709-0811 – I’m here to help!