If you are looking to buy your first home, qualifying isn’t always the toughest part. For a lot of clients I have met over the past year, coming up with the 5% down payment (which is the minimum since the zero down payment was taken away last year) appears even more difficult. Many people are trying to get out of renting because a mortgage on a home would be cheaper and then your money is going toward equity in your home.
When paying that high rent each month, it does make it really hard to have any extra money to put away. Setting up a budget and cutting out unnecessary “extras” is the obvious way to set money aside for a down payment but what’s the best way to make this money work for you? Here is an idea on how to benefit the most from what money you are able to put away for you down payment.
The government of Canada has a program designed for First Time Home Buyers, simply called the First Time Home Buyers Plan (ingenious title isn’t it?) How this plan works is it allows first time buyers to withdraw money from their RRSP’s, tax free and interest free, to put toward their down payment on their first house. You do have to eventually put that money back as it’s great to get into your first home but if you drain your retirement savings in the meantime, you are no further ahead. That problem is solved by giving you a 2 year grace period in which you do not need to make any payments and then you are given 15 years to pay back the full amount and not be taxed. The maximum amount to be withdrawn is $25,000/person. This is a one-time deal. The only exception is if you happen to sell your home and rent for 5 years, then you will requalify for this program.
Sounds simple right? Well, chances are, if you have no savings, you probably have no RRSP’s to withdraw from so I still can’t solve the problem of not having the extra cash flow but what I can do is give you advise to make the most of what you can put away.
The best thing for you to do is to put your “extra” money (when you are able to find some) into a TFSA (tax free savings account). A TFSA is an account that gives you the benefit of investment income and capital gains, like an RRSP, but allow you to withdraw money at any time, tax free.
Now that we have some money saved up and you’ve started looking for your dream home. You need to consider a couple things. Contributing to your RRSP’s has tax implications. If you contribute everything from your TFSA into an RRSP, you will generally receive a tax rebate when you file your income tax. Bonus, extra money! The catch is, to use your RRSP money through the FTHB plan, it MUST be in the RRSP for 90 days so you do have to preplan to use this strategy.
One thing to consider is, if you do decide to go the route of contributing to your RRSP’s from your TFSA, is that you do have to repay that RRSP or you will be taxed on the funds, defeating the purpose of all this planning. If repaying 1/15th of the money you withdrew does look like it’ll fit into your budget, then don’t put it into your RRSP’s, just use your TFSA for you down payment. If you think you’ll be able to make those payments 2 years down the road when you are required to, then get that money in those RRSP’s and prepare to collect the refund when tax time comes around. That free money from the government could be used to help pay back a portion of your RRSP’s when the time comes, it could be added to increase your down payment or to purchase things you’ll need for your new house. The possibilities are endless! I’m sure we can all easily find something to do with our tax rebate!
This may sound a little bit complicated but it’s really not. It just requires the right advice and planning. If you have any questions about any planning methods, give me a call, I’ll help simplify it. Wouldn’t it make you feel better to know that you got the maximum benefit from that money you worked so hard to save up?!
Naomi Hamm, Mortgage Broker & Partner
Office: (204) 727-2177
Cell: (204) 724-7290