Finance Your First Home Through your RRSP
9 March, 2010 / by Bryan Jaskolka
Using RRSPs to Help Finance Your First Home
It’s the end of RRSP season and that means you’ve likely sat through endless commercials advertising about the importance of contributing to your RRSPs. According to a recent poll by RBC RRSP, only about 35 per cent of Canadians contributed to an RRSP in 2009, which is the lowest contribution rate since 1996.
While RRSPs may seem uninteresting, don’t forget that there are several alternative ways to use your RRSP before retirement, including: income splitting, the Life Long Learning Program, and most importantly, to us, the First-time Home Buyers’ Plan (HBP).
How Does the HBP work?
First-time home buyers can withdraw up to $25,000 from their RRSP to be used toward the purchase of a qualifying home. If you purchase the home with a spouse or other individual, each personal can withdraw $25,000.
The withdrawal is repaid in equal payments over 15 years. This means that for the next 15 years, you need to continue to contribute to your RRSPs. At tax time each year, you simply allocate the designated amount of RRSP contribution to the Home Buyers’ Plan.
Be aware that the money allocated to repaying the HBP is not tax deductible in that year as tax was already deducted the year in which you originally made the contribution. Essentially, you’re only paying back the money you borrowed from yourself.
The biggest disadvantage of participating in the HBP is that in, essentially, borrowing money from yourself, you lose the full impact of compound interest on your RRSP investment. Nevertheless, many people feel that the loss on the investment is worth the gain in the ability to afford to make a down payment on a house or to use that money to make renovations.