Today, there are better options for First Time Homebuyers
RRSP & TFSA contributions make for a healthy nest egg
Discussing what’s better for first time homebuyers; using their RRSPs or their TFSAs. Changes over the years depend largely on what’s been happening in the Canadian economy. Finally, first-time homebuyers have more options when it comes to being able to come up with a down payment.
RRSP Homebuyer Plan
In March the federal government announced they were increasing the Homebuyer Plan amount to $35,000 from $25,000. When combined with a spousal contribution, that bolsters the withdrawal limit to $70,000.
This plan allows first-time homebuyers to borrow from RRSPs, without any tax penalties, to purchase a home.
In most other instances, with the exception of the Lifelong Learning Plan, withdrawing money from your RRSPs before retirement is taxable & expensive.
The catch is that first-time homebuyers have to pay the money back into their RRSPs over 15 years.
If they choose not to, the annual amounts are added to the borrowers income & taxes at the highest marginal tax rate. Needless to say, that’s not a smart financial move.
Yes, you & your home need to qualify for the RRSP Homebuyer Plan before you can access it. You must be a first-time homebuyer & not currently living in the place you’re buying, except if you & your spouse or common-law partner are splitting up.
The TFSA just had its 10th birthday & if you were over the age of 18 in 2009, your available contribution limit has accumulated to $63,500. For those who have kept up with their maximum contributions since the inception of the tool, you’ve now got a healthy nest egg, assuming you didn’t lose it all with bad investment decisions. And, if you’re spouse kept up with their contribution, your nest egg could be double that amount.
Many homebuyers, first times or not, like the TFSA because it allows for their saving to earn interest & returns tax-free.
When the money is withdrawn, there are no penalties & no requirement to pay it back. The bonus with this tool is that you get your contribution room back, which means you can top it up again.
Put the Two Together
Should you & your spouse have funds in both the RRSP & TFSA & you qualify for the Homebuyers Plan, why not use both tools towards your down payment; especially if you live in an expensive real estate market like Toronto, where every penny counts. With either plan, the money for your down payment needs to have been in the accounts for 90 days before the bank will agree to the mortgage.
If you don’t have enough to meet your down payment, which I recommend is at least 10%, keep saving up in your RRSPs & TFSAs.
You may even have to sacrifice some of the luxuries you currently enjoy such as coffees or meals out to amplify your contributions.
But, eventually, you’ll reach your goal, & you’ll have formed some seriously good financial habits along the way that you’ll need when you become a homeowner.
As a homeowner in one of Canada’s most expensive cities, Toronto, I completely understand that neither the Homebuyer Plan nor the TFSA make homes in Canada less expensive.
But, in my opinion, both of these tools make it a touch easier to stitch together your down payment.
Source: TheStar - Lesley-Anne Scorgie – May 2019
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