By Remitbee - Feb 4, 2022
It is everybody's dream to buy and own a house. But reaching this goal is not easy. It requires a lot of your time, hard work, and, most importantly, money. This is the reason why many people opt to rent. Although renting may seem practical and less costly, renting for an extended period could hurt your pocket in the long run.
Yes, purchasing your own home can be challenging financially, but it is not impossible! In Canada, the government offers a Home Buyers' Plan or HBP to aid homebuyers in getting their new house. This article will discuss what Home Buyers' Plan is, how it works and how to use your RRSP to buy your first house.
Home Buyers' Plan or HBP is a program that enables Canadians to withdraw from their retirement plan holdings as a loan to make a home purchase. In this program, citizens can use up to $35,000 from their Registered Retirement Savings Plan or RRSP without tax.
As a government incentive program, the HBP allows homebuyers to repay the borrowed funds for a period of 15 years. How convenient, right? In addition, this program is perfect for couples because they can get up to $70,000 if both of them apply for this program. This means bigger funds and more chances to get a better house.
While this program would be beneficial for people to fund their first home purchase, it is not for everyone. To make a successful home purchase, you must first qualify for the HBP and meet specific requirements:
For at least 90 days, you must provide sufficient contributions in your RRSP before you can withdraw them. This will be the most vital step to qualify for the program.
The next step is to submit a completely filled-out copy of Form T1036 to the financial organization that has your RRSP account.
After providing the needed documents, make the purchase. Thirty days after buying the house, you can finally withdraw the funds from your RRSP account. The final step is to declare your HBP withdrawal in your income tax return.
RRSP withdrawal for the Home Buyer's Plan can be pretty straightforward. Note that you can withdraw once or a series of withdrawals in the same calendar year.
If you are a first-time home buyer RRSP holder, acquire form T1036 and fill out Area 1.
After you fill out the form, please submit it to your RRSP issuer. You should only fill out the Area 1 of the form, while Area 2 should only be filled out by the issuer.
To make your transaction faster, make sure to fill out and print the form before going to the financial institution.
One of the advantages of the RRSP Home Buyer's Plan is that it helps aspiring first-time homeowners access some of their funds. Through RRSP, the homebuyer can gather the 20% down payment required to prevent paying default insurance premiums.
Another advantage of RRSP is that you can make withdrawals before retirement. This is the reason why this is perfect for start-up families. You don't have to wait for your retirement to access the fund. As long as you qualify for the program and meet the requirements, you can do it anytime you choose!
The downside of RRSP is its strict repayment rules. Since this is a loan, you need to repay it according to the plan. Commonly, repayment should be accomplished within 15 years, wherein 1/15 of the amount loaned should be made yearly. That means you must secure that you have the financial means to make payments to your regular mortgage and RRSP repayment. Failure to follow these repayment rules can result in a penalty.
Another disadvantage of the HBP is the loss of potential growth. Withdrawing some funds to make a downpayment for your first home will affect your finances in the long run. This means that reducing your RRSP funds today to be repaid after 15 years will not give your remaining fund the chance to grow and earn compound interest.
Although purchasing a house is a huge life decision, it's also important to have extra money to compensate for the withdrawn funds. Moreover, once funds are taken from your RRSP, you cannot cancel your HBP, except if you move out of Canada as a non-resident or you did not end up purchasing a home.
RRSP Home buyer's plan is an excellent way for people to get their first home. Yes, it has drawbacks, but no one can deny the ease it may provide to people trying to buy their perfect home!
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