USING YOUR RRSP — "HOME BUYERS PLAN"
The Federal Home Buyers Plan allows first time home buyers to withdraw up to $20,000 from their RRSP for the purpose of buying or building a qualifying home. The primary benefits are that the RRSP issuer will not withhold tax on the amount nor will you have to claim the amount as income. The amount must be repaid to the RRSP within 15 years with a minimum annual payment of 1/15th of the amount withdrawn. If a repayment is not made for a given year the minimum repayment is included as taxable income for that year.
Participation
To participate you have to withdraw the amount from your RRSP using form T1036 Applying to Withdraw an Amount under the Home Buyers Plan. Give the completed form to the RRSP issuer along with the certification that you meet or intend to meet certain conditions as follows:
Conditions
- You have to make your withdrawal request in the same year you wish to participate in the Home Buyers Plan
- You cannot have previously participated in the plan in previous years.
- You have to be a resident of Canada
- You have to enter into a written agreement to buy or build a qualifying home
- You can withdraw a total of $20,000. Multiple withdrawals are allowed. Each of you and your Spouse can participate in the Plan and withdraw $20,000 from your own RRSPs.
- You have to be considered a First Time Home Buyer
A qualifying home is a housing unit located in Canada. Existing homes and homes under construction are both qualifying homes and can be either:
- Single Detached Family Homes
- Semi Detached
- Town Home
- Mobile Home
- Condominium Unit
- Apartment in a Duplex, Triplex, Four-plex or apartment building.
- A Share in a Cooperative Housing Corporation provided the share entitles you to posses, and gives an equity stake in, a housing unit.
First Time Home Buyer
You are considered a first time home buyer if you have not owned a home while you occupied it as your principal place of residence for five years. At any time in the fifth calendar year since you last owned a home you can qualify.
Recent Improvements
The 1998 budget now allows Canadians to use the homebuyers plan again. The applicant must have no outstanding balance on any previous Home Buyer Plan loans and must re-qualify for the program again. This means the home owner must re-qualify as a first time home buyer by not owning for the prescribed period. The effective date of the changes is 1999.
Should You Take Money Out of Your RRSP For A Home Purchase?
Withdrawing $20,000 from your RRSP under the "Home Buyers Plan" can be viewed as a loan from your RRSP to yourself. Some call this a zero interest loan but of course the actual cost of the loan is exactly what the funds would have earned if they had remained in your RRSP. You will forego these earning if you take the funds out and use them for a down payment. On the other hand if you don't withdraw these funds you will be forced to borrow the required down payment.
Let’s assume you have $20,000 in your RRSP at an average annual rate of return over the next 15 years of, say 8%. In 15 years your $20,000 will have grown to $63,443, an increase of $43,443. As such if you withdraw these funds under The Home Buyers Plan, while you won't suffer taxes, you will forego these earnings.
Most financial advisors will counsel you to borrow to invest in your RRSP because the "overall" rate of return from your RRSP is greater than the cost of borrowing the money. The cost of borrowing $20,000 in a catch up loan over 15 years is usually in the neighborhood of Prime, plus or minus a percentage point, depending on the risk of the RRSP investment. Assume a cost of 7.5% over the 15 year amortization of the loan. The interest paid to borrow $20,000 would be $13,372. If we also assume a 35% tax rate, you would have to earn $20,572 of gross income in order to net out these interest costs.
We can now compare the before tax cost of borrowing - around $20,572 - with the before tax return this $20,000 would earn in your RRSP - around $43,443. Clearly it makes sense to borrow to invest in your RRSP. Conversely, it should also make sense to leave the money in your RRSP and borrow your down payment, one being the same as the other.
In reality, no mortgage lender will finance 100% of your purchase price. In addition, your lender will qualify you for a larger mortgage, based on gross income, if your debts are lower and don't include a large personal loan for the down payment. A personal loan or second mortgage is a debt that squeezes the maximum mortgage amount you will qualify for if it puts you above the lenders target debt service ratios.
In addition withdrawal under the Home Buyers Plan may be more cost effective than borrowing if this borrowing cost also includes a CMHC fee. This fee can dramatically push up your effective interest rate. If you're just shy of a conventional down payment of 25% it may be wise to withdraw the remainder from your RRSP to avoid paying mortgage insurance fees.
The best approach is to withdraw from your RRSP under the Home Buyers Plan, get all the financing you qualify for, and then once the mortgage is funded borrow to replenish the RRSP if you can afford the payments. Remember you'll also have to pay back your RRSP 1/15th each year.
Tips
Pay back the minimum 1/15th required each year if you borrow through the home buyers plan. Repayments do not trigger another tax savings. All savings above the minimum 1/15th repayment should be designated 'contributions ', rather than repayments, and invested into your RRSP. You'll receive the tax savings on these amounts each year.
Always invest as much as you can in your RRSP, even if you have to borrow, but be sure you can afford to carry the loan.
Withdraw the money from your RRSP only if you have no other source of non RRSP savings.
Saving Your Down Payment Using your RRSP
To accumulate $20,000 in a non RRSP savings plan, assuming an 8% return and a marginal tax rate of 35%, you would have to invest $3,605 each year for the next five years. This would mean earning $5,546 in gross income each year in order to net out this $3,600 in after tax savings.
Rather than spending this $5,546 in gross income each year on a non RRSP investment, you could invest this same amount into your RRSP. With yearly RRSP contributions of $5,546, you will accumulate about $32,536 in five years. You will also receive tax savings each year in the amount of $1,941. Another way to look at it is that you could accumulate the required $20,000 down payment in about 3 1/3 years by choosing the RRSP savings approach. IT ALWAYS MAKES SENSE to save through an RRSP, whether the savings will be for a house or retirement.
Other Plans
Tax-Free RRSP Withdrawals for Lifelong Learning
Canadians will be eligible to make tax-free withdrawals from their RRSPs to support lifelong learning. Individuals will be able to withdraw tax free up to $10,000 per year from their RRSPs, with a maximum of $20,000 over a four-year period. To preserve retirement incomes, these withdrawals will be repayable over 10 years.
More tips:
What if I want to sell my home before I have paid off the RRSP loan?
You do not have to repay the remaining balance if you sell your home before your scheduled payments are complete. And you are not required to continue to own the home until the amount borrowed is repaid.
In some situations, outstanding repayment installments have to be reported as income by the borrower:
When you leave the country. If a taxpayer ceases to be a resident of Canada, "the balance of withdrawals made under the plan and not yet repaid must be repaid within 60 days of ceasing residency, or must be included in the individual's income for that year."
If you die? When an individual dies with an outstanding Home Buyer's Plan repayment balance, "the outstanding amount must be included in the deceased's income for the year. There is an election that may be made in certain circumstances to allow a spouse of the deceased to effectively take over the deceased's obligations with respect to repayment installments."
When your RRSP mature? If you have an outstanding Home Buyer's Plan repayment balance at the end of the year in which you turn 69 - the deadline for collapsing an RRSP - this outstanding amount must be repaid before year end or be reported as income on your tax return.
THE BUSINESS REPORT
Toronto Stock Exchange has its biggest one-day gain since 1987
Wall Street’s Dark Days / Bay Street’s New Dawn
US Congress hopes to pass the “mother of all bailouts” today! $700 billion is the largest buyout in history, to purchase US bad debt at the heart of the mortgage crisis.
Financial Post -- U.S. lawmakers worked through the weekend in a scramble to put together legislation to allow a US$700-billion government bailout fund aimed at halting the worst financial crisis since the Great Depression. The U.S. Congress hopes to pass the legislation as early as this week. It would give the U.S. Treasury Department the unprecedented authority to buy up hundreds of billions of dollars worth of toxic mortgages and other debt held by banks that operate in the United States.
- TSX +848.42pts
- Dow +368.76pts
- Dollar +1.06c to $94.18US.
- Oil +6.67to $104.55US per barrel
- Gold -32.10 to $860.600US per ounce
| Monday | Tuesday | Wednesday | Thursday | Friday | Gain on Week |
|---|---|---|---|---|---|
| -515.55 | -27.04 | -349.30 | +186.88 | +848.42 | +1.1% |
Steeper drop in Canada's existing home prices
Garry Marr, Financial Post
TORONTO -- The average price of a home sold in Canada's major markets dropped 5.1% in August from a year ago, the largest decline in more than 12 years, according to the Canadian Real Estate Association.
House prices have dropped for three straight months and it's probably only the beginning, says Benjamin Tal, senior economist with CIBC World Markets.
"The 5% is not much. It will get worse. There is no information that it will stop in the west," Mr. Tal said.
The average price of a home sold in Canada's 25 largest markets was $316,052 last month. It was the largest year-over-year decline since February, 1996. The drop comes after prices fell 3.6% in July from a year earlier, and 0.4% in June.
Mr. Tal said the problem in Western Canada was speculation and it was only a matter of time until a correction occurred. He predicts Calgary and Edmonton prices will continue to fall and suspects Regina and Saskatoon, where prices are up 36.1% and 10.3% over the past year respectively, will soon follow. "The West overshot, the rest of the country is simply leveling off," he said.
Ottawa-based CREA was more optimistic and pointed out this year's market has the task of being compared with 2007. "When comparing statistics, remember 2007 was a record year for real estate sales in Canada," said Calvin Lindberg, president of CREA. "In light of that fact, our current market can certainly be characterized as stable."
Mr. Lindberg believes market fundamentals in Canada are solid with mortgage rates at near record low levels. "The challenge is for sellers to price their home to meet the local market realities and for buyers to realize there is no real estate bubble that will burst and send prices to new lows."
Despite that assertion, five of the major markets saw price declines. In Vancouver, prices dropped 5.2% in August from a year ago to an average of $557,114. Calgary prices were down 8% during the same period to $390,091.
In Toronto, home prices are no longer keeping pace with inflation with the average price of a home up 0.8% in August from a year ago.
The statistics show activity slowing rapidly with 22 out of the 25 markets down from a year ago. Sales declines were off more than 15% in almost half the markets with Vancouver activity off 53.9% from a year ago.
Gregory Klump, chief economist with CREA, said not as many new listings are coming to market and that should take some of the pressure off prices.
"New listings in August were down 5.3% from a month earlier," Mr. Klump said.
With prices no longer rising and starting to fall many sellers are taking their houses off the market, according to Elton Ash, regional executive vice-president of Re/Max of Western Canada. "It's a more challenging time," he said, referring to real estate agents. "I think we are going to see a return to more experienced realtors."
Weekly Market Commentary
North American indices pare weekly losses as U.S. policymakers explore comprehensive solution to global credit crunch
North American equity markets closed a turbulent week with a strong relief rally Thursday on indications that details of a sweeping series of market interventions from the U.S. Federal Reserve and the U.S. Treasury will be provided Friday morning. The plan is expected to revolve around the creation of an agency that would allow the Federal government to buy large amounts of troubled assets from American financial institutions in order to promote the flow of capital through the financial system.
Most of the world’s major equity markets fell sharply earlier in the week after tight credit conditions forced investment bank Lehman Brothers Holdings Inc. to file for bankruptcy protection and Lehman rival Merrill Lynch & Co. sold itself to Bank of America Corp. for US$50 billion. News of the U.S. Federal Reserve’s decision to leave its benchmark overnight lending rates at 2 per cent, coupled with its US$85 billion bailout of American International Group Inc., the world's largest insurance company, further rattled investors.
Fed officials this week also launched a coordinated effort, together with several of the world’s major central banks, to inject as much as US$180 billion into global money markets through overnight and term loans to facilitate inter-bank lending in the wake of this week’s turmoil... Learn More
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