First time home buyer? Time to talk about your RRSP…

Is it time to talk about your RRSP?

It’s always a great time to talk about your RRSP. When we do something for the first time, we often find ourselves feeling a sense of intimidation. We could be going to our first ever yoga class, or simply exploring a new grocery store. Going to a yoga class can seem overwhelming and we can find ourselves jumping on those “what ifs?” What if I can’t do a pose? What if I embarrass myself? Exploring a new grocery store can also cause us to feel overwhelmed. We find ourselves wandering around like a fish out of water simply looking for the aisle with pasta. 

We often forget that there are people around to help aide the “first-timers.” Yoga instructors will support you to get into the pose and props can be used to help. At the grocery store, signs and workers help illuminate the way. As first-time home buyers, we can often find ourselves feeling overwhelmed with the same sense of intimidation. Fortunately, there are things available to first-time homebuyers to illuminate the path to homeownership.

Programs to help buy a property

With housing prices on the rise, it can seem almost unachievable to afford to buy a home. You keep putting aside more and more money to combat the rising housing prices. You also put money aside each pay cheque to go into your retirement plan, such as your RRSP. With Canada’s First-Time Home Buyers’ Plan, home owners can borrow up to $35,000 from their RRSP to help fund their purchase. The Home Buyers’ Plan helps you access funds to use for a down payment on purchasing your first home. It alleviates some of the stress and financial burden of meeting the amount for a down payment and the costs associated with buying a home.

What is an RRSP?

An RRSP is a Registered Retirement Savings Plan. It is a way for Canadians to invest and save money for retirement. When you contribute to your RRSP, you do so with pre-tax income. This means that you can reduce your income for the tax period that you contribute. Your RRSP will continue to grow tax-free until you withdraw funds. However, at the time you withdraw funds, they are subjected to being taxed at the marginal rate. However, the Canadian government wants to encourage retirement savings. They’ve provided a tax deferral to delay the payment of taxes on RRSP withdrawals until retirement when tax rates are lower. An employee can contribute up to 18 per cent of their income to their RRSP, up to a maximum of $26,500 in contributions for 2019. You have until March 2, 2020, to contribute to their RRSP for the 2019 tax year.

How is an RRSP beneficial to buying a home?

When buying your first home, an RRSP can be very beneficial. With the First Time Home Buyers’ Plan, home buyers can withdraw up to $35,000 from their RRSP. For partners purchasing their first home, you may both contribute up to a total of $70,000. For the average home buyer in Halifax, it would take approximately four years to save $35,000 in RRSPs. Even though it may seem like a long time, your funds are contributed pre-tax. Additionally, the amount that you withdraw from your RRSP is tax-free as long as you pay back the balance.

Home buyers borrowing from their RRSP to fund the purchase of their first home have up to 15 years to pay back the money borrowed. However, home owners must start making annual payments back to their RRSP no later than 2 years after the purchase of their property. Home owners that fail to meet the minimum annual payment must report the difference in their annual tax return. Therefore, if you do not repay the balance owing, this amount will be taxed as income.

Let’s put it to the test…

Let’s envision that a first-time home buyer has borrowed $13,000 from their RRSP. The money borrowed from their RRSP is being used to fund their down payment. Up to two years after the purchase of the property, they will be required to make a minimum repayment of $1,000 each year back to their RRSP. When they make a payment larger than $1,000 in a year, the amount they have to repay annually is reduced. Moreover, if repayments start before the first two years the annual amount needed to be repaid is reduced.

Firsts of anything can feel uncomfortable and overwhelming at first. It’s ok to feel out of your element. Luckily, there are people and programs around to help you feel a little less overwhelmed. Mortgage professionals and programs like the First Time Home Buyers’ Plan can help you achieve your goals of homeownership without feeling intimidated. The best time to talk about your RRSP is before you think you need to! Being proactive with planning will make your first-time home buyer experience much easier.

When it’s time to talk about your RRSP, you should seek out a mortgage professional. They will work with you to review the “what ifs?” of buying your first home and how to make that dream a reality. When you’re looking for a mortgage professional, come talk to our first time home buyer experts at Clinton Wilkins Mortgage Team. You can reach us at 902-482-2770 or get in touch with us here!