By Chuck Duerden
If you are looking to enter the housing market — and if you meet the definition of a first-time buyer plus other conditions — the federal government will help you buy or build.
It will allow you to withdraw funds directly from your Registered Retirement Saving Plan (RRSP). That’s tax-free.
This is made possible through the Home Buyers’ Plan (HBP), under which you are allowed to withdraw up to $25,000 from your RRSP in a calendar year for the purpose of acquiring a home for yourself or a disabled relative.
Your spouse can also draw up to $25,000 out of his or her RRSP if you’re planning to buy or build a home together, if both of you meet the HBP’s qualifications. In the case of a spousal RRSP, monies may be withdrawn under the Program in the name of the annuitant, or owner, rather than the contributor.
If you withdraw more than $25,000, you will be liable for taxation on the excess.
A program as generous as this does not come without conditions.
- The contributed monies you withdraw from your RRSP must have been in the account for a minimum of 90 days before you can take them out under the HBP.
- Otherwise, they may not count as deductions for any year in which case the Canada Revenue Agency (CRA) will levy a tax on them. So watch out.
- The funds you have taken out from your RRSP must be paid back over the next 15 years. It does not matter if the original HBP withdrawal came from a regular RRSP or from a spousal one; the funds must be repaid to a regular RRSP.
- If you do not repay on schedule, the required amount is added to your taxable income for the year. However, you can repay the full amount into your RRSP(s) at any time. If you don’t, then the CRA will send you a Home Buyers’ Plan statement of account, with your notice of assessment (or reassessment).
- The home that you buy or build must become your principal residence within one year of completing the purchase or the construction. If you’re buying or building for a relative with a disability, that person must likewise occupy the home as his or her principal place of residence.
- In other words, the home must be for you rather than something you plan to rent out.
- We come to the thorny question of what constitutes a first-time home buyer under HBP rules.
- Get this: rather than being disqualified if you have ever owned a home in Canada, the rules state you are considered a first-time home buyer if, within the preceding four years, you did not occupy a home owned by you alone, or in conjunction with your spouse or common-law partner.
- To make the program even more accessible, even if you have taken advantage of the HBP before, you might still be able to participate again, providing your repayable balance on your HBP account is zero on Jan. 1 of the year you wish to make another withdrawal.
All this is all well and good, I hear you say, but what if neither I nor my spouse have $25,000 in our RRRSPs or anything like the amount necessary for the down payment on the home of our dreams?
Fear not, for qualified applicants, it may be possible to borrow money from a specialized lender to purchase an investment to place in an RRSP.
The same rules for withdrawing funds apply as before; an investment purchased with an investment loan must remain in an RRSP for 90 days before it can be withdrawn, and then of course liquidated to free up the necessary cash.
That means having selected your dream home, and presumably qualified for mortgage financing also, you must cool your heels for three months before you can start moving to purchase it.
You’re probably wondering what happens to the loan you took out to purchase the investment for your RRSP. Well, it will continue to exist and continue to require servicing as part of your overall debt load.
That’s the downside of this strategy; besides the debt of your mortgage you will also have the debt for your down payment.
Obviously, it is an approach that should be attempted only if your credit is strong. And that’s where we come in; if you are considering using a leveraged load to access the Home Buyers' Plan, or even using your RRSP to access the HBP without such a loan, talk to a financial adviser first.
These are relatively complex financial strategies, and, as we have mentioned, not without an increase in risk.
We would be remiss, particularly for our readers in British Columbia, if we did not mention a new program recently announced by the provincial government to assist would-be home homebuyers.
If you are a first-time home buyer (that phrase again!) the B.C. H.O.M.E. Partnership Plan will match what you have saved for a down payment up to $37,500 or five per cent of a maximum purchase price of $750,000.
For the first five years, the loan will be interest free and payment free. After five years, buyers can either repay their loan or enter into monthly payments at current interest rates. Like most mortgages, loans awarded through the program become due after 25 years.
Conditions as always do apply and in this case, unlike the Home Buyers' Plan, an important one is that to qualify as a first-time buyer for the H.O.M.E. program you must not have owned an interest in a residence anywhere in the world at any time.
Another stricture is that you must intend to reside in the home you are purchasing with the aid of the Program for the first five years.
You must have obtained a high-ratio insured first mortgage on the property for at least 80 per cent of its purchase price.
(A high-ratio mortgage is one in which a borrower places a down payment of less than 20 per cent of the purchase price on a home.)
Also, since the Program is geared to fostering home-ownership among middle-to-lower income British Columbians, the maximum combined annual income of all persons on the title must not be greater than $150,000.
Since this is a matching program, by implication you must have a down payment amount at least equal to the loan for which you plan to apply.
When coupled with the federal Home Buyer’s Plan mentioned above, the B.C. H.O.M.E. Partnership Plan greatly expands the possibilities of home ownership for qualified applicants.
It should be stressed once more that given its complexity such a strategy should not be attempted solo but rather with capable financial adviser.
Chuck Duerden is an insurance and investment consultant at Septen Financial.