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Andrea
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Using your RRSP to buy a home
Date: February 19, 2004
By GWYNN SCHELTEMA
Almost half of today's first-time home buyers use their RRSP savings to
help finance a down payment. The federal government's RRSP Home Buyers'
Plan (HBP) allows participants to withdraw up to $20,000 ($40,000 per
couple) to purchase or build a house. No taxes are deducted provided
that the funds are then repaid to an RRSP according to the government's
repayment schedule within 15 years.
"Without this plan, we would have faced a choice: do we save for the
house or do we save for our retirement," says Terence, a 30-year-old
government employee. "The HBP allowed us to do both, and also bettered
our debt-to-asset ratio, making it easier to get a mortgage."
To participate in the plan, you cannot have owned a principle residence
for the past five years. Generally, you can only participate in the
plan once, and your RRSP contribution must be made at least 90 days
prior to withdrawal.
"Saving for a home is hard," says his partner, Lisa, a financial
administrator. "Our combined income was just over $70,000 at the time
we bought into the plan. We both had student debts to pay off too, but
once the money is invested in the RRSPs, you don't have the same
temptation to spend it. Having thousands of dollars in cash is too
tempting when you are thinking of a vacation or a new car."
"Besides," adds Terence, "the impact of compound interest can't be
ignored. By starting early, we can afford to invest less in the long
run."
"Starting early has other advantages," says Don Anderson, a real estate
agent for nearly 15 years. "Saving for a first home through the HBP
gets young people in the habit of regular RRSP saving. After they've
bought a house, they have to meet the repayment schedule, and then they
tend to continue to buy RRSPs for retirement."
Lisa agrees. "Even though the house purchase closes in April this year,
and we have so many things to pay for, I still invest in an RRSP on
every paycheque."
To participate in the plan, your home must be located in Canada, and
must serve as your principle residence within one year of purchase. New
and existing homes qualify, and can include detached or semi-detached
houses, townhouses, condominiums, mobile homes, apartments in a duplex,
triplex, fourplex or apartment building, and even a share in a
co-operative housing corporation.
To retain a tax-deferred status, the money withdrawn for the home
purchase must be repaid over 15 years. RRSP repayments are made on or
before Dec. 31 each year, beginning in the second year after purchase.
If you pay less than your scheduled annual payments, the shortfall is
reported as income on your tax return for that year. Repayments do not
receive a second tax break, so you must tell your RRSP insurer that it
is not a regular contribution and complete an RRSP repayment form.
"Using the Home Buyers' Plan made buying a home easier," says Terence.
"RRSPs provide us with a feeling of financial stability. You know
you've grown up when you start looking at RRSP options!"
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