First Time Home Buyer

Are you tired of working just to pay the rent?  More than anything else, you want to buy your first home.  The biggest obstacle you’ll probably face is coming up with the down payment.

There are a number of ways to overcome the down payment dilemma:

• You could cash in all of those pennies laying around your home (might come up a little short) 

• You could borrow money from your parents

If these alternatives are not appealing then consider borrowing money from yourself. Canada Revenue Agency (CRA) (typically the money takers) will allow you to borrow money from your Registered Retirement Savings Plan (RRSP) to buy your first home. The program is called the "Home Buyers Plan." 

You will not be taxed on these funds when withdrawn, as long as the proper forms are filled out and you follow a few basic rules:

Maximum is $20,000 per person. A husband and wife could use $40,000 in total for the purchase of a jointly owned home (the same rules apply to common-law relationships).

You must have a valid written agreement to purchase before you can withdraw the funds.

You must actually buy a home with the funds (trips to Hawaii do not qualify) by October 1 of the year following the withdrawal. If you don't actually buy the home by the October 1 deadline, funds must be returned to your RRSP by December 31 to avoid income tax.

You must not have owned a home in the last five years to be eligible for the program. If you and your spouse lived together in a home that was owned by one of you prior to marriage, then neither of you will qualify.

What are the repayment terms of the RRSP loan?

The loan is interest free and must be repaid to your RRSP in 15 equal annual instalments starting with the second year after you withdraw the funds. If you withdraw the funds in December 2006, then your first instalment will be due in 2008. As with other RRSP contributions, you will have until 60 days after the tax year to make the repayment (by February 2009 using the same example). If you skip a payment, then the repayment amount (1/15th of the loan) will be taxable income to you in the year that you missed.

What if I don’t have $20,000 in my RRSP?

You may consider first borrowing money from the bank to contribute to your RRSP then withdraw the funds to purchase your home. This assumes you have $20,000 RRSP room. 

The benefits of this are:

• More funds available to put down on your home. This could allow you to get a conventional mortgage (minimum 25% down payment required) and avoid the fees charged by the Canada Mortgage and Housing Corporations (approximately 2.5% x amount mortgaged).
• Reasonable bank interest rate on the RRSP loan (typically prime plus 1% or lower).
• Possible tax refund generated fro the contribution (26%-53% depending on your tax bracket).

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