*Maximum withdrawal amounts have been updated to reflect changes made in 2019
Together, with friends at The Loop by Sympatico.ca, we decided that the most commonly misunderstood part of buying a home is the calculations that go along with it. As a result, Mortgage Math was planned and produced for homebuyers at any stage in the buying process.
Buying a home is a huge investment and, for many first-time buyers, saving for a down payment can take years. However, there is a government program in Canada that allows eligible first-time buyers to withdraw up to $35,000* from their RRSPs to put towards their down payment.
Join us in our third Mortgage Math video as Toronto Realtor Lauren Haw walks us through the eligibility requirements and repayment process for the RRSP Home Buyers’ Plan.
Saving up for a down payment can feel like an impossible feat. So, if you’re a first-time home buyer in Canada, you’ll be happy to know you may be able to withdraw up to $35,000 from your RRSP tax-free. We’ve brought in Toronto realtor Lauren Haw to walk you through the details of the RRSP Home Buyers’ Plan.
In order to be eligible for the RRSP Home Buyers’ Plan, there are a few requirements you’ll need to meet. First, you cannot have owned a home in the last four years. Next, you must sign an agreement to buy the home and must intend to live in the property within a year. If you’ve used the Home Buyers’ Plan in the past, you cannot have an outstanding balance. You must make the withdrawal within 30 days of taking title of the home. And finally, the money has to be in the RRSP account for a minimum of 90 days prior to withdrawal.
If you satisfy all the requirements, you can withdraw up to $35,000 towards your down payment. If you’re buying a home with your partner, and you both meet the requirements, you can each withdraw up to $35,000 towards a down payment, for a total of $70,000. If you’re buying a home with your partner, but only one of you meets the requirements, that eligible partner can still withdraw up to $35,000 from their RRSP. Think of this one-time tax-free withdrawal as a loan from your RRSP to yourself. The CRA requires that that loan is repaid within a 15-year period.
Let’s take a look at how the RRSP Home Buyers’ Plan works.
The government requires that you make the first repayment two years following your home purchase. So, in this example, our homebuyer purchases the home in 2013 and withdraws $19,500 from their RRSP account; that means in the year 2015, they have to make their first payment.
Let’s figure out how much that payment is. We take the total amount of the withdrawal, $19,500, divide it by 15 years, and we come up with the minimum payment. This minimum $1,300 payment must be made each and every year.
You might be wondering what happens if that $1,300 payment is not made. In any year you fail to make the minimum payment, you have to claim the difference as taxable income on your annual return.
Going back to our original example, our minimum payment was $1,300. So, in a year you only make a payment of $1,000, we calculate the difference to be $300, and that $300 has to be claimed as taxable income on your annual return.
Let’s take a look at what happens when you make a payment larger than the minimum. In the year 2013, you purchased a home and withdrew $19,500 from your RRSP. In the year 2015, you made your first minimum payment of $1,300. In the year 2016, we make a large payment of $8,075; that means from 2017 going forward, we need to calculate a new minimum.
We do that by taking the original withdrawal amount and subtract the total paid so far. That will bring us to $10,125. We divide that new balance by the 13 years remaining, to bring us to a new minimum payment of $778.85.