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MORTGAGE BLOG: check it out

MORTGAGE BLOG:  check it out  
  • Billie Mesiano, Mortgage Specialist RRSP Home Buyers Plan is a fantastic way to save for your first home purchase.

    The benefits to contributing to an RRSP is that it allows you to save money that earns tax-free interest and that it provides you a tax break in the year that you contribute. But did you know you can also use these savings towards your home purchase?

    Canada Revenue agency allows first time buyers AND people who haven’t owned a home in five years to borrow up to $25,000 from your RRSP to put towards the house you want to own.

    It’s not simply withdrawing the money, however. You have to pay the money back! You are borrowing them from the RRSP and they need to be repaid. The payments will start in the second year after the year you made the withdrawal (so if you withdraw in 2010 you need to start putting that money back in 2012) and you have 15 years to pay them back.

    You are required to pay back a minimum of 1/15 per year until the withdrawal is paid back. These repayments are not considered contributions to your RRSP, so you cannot deduct them from your taxes twice (they are only tax deductable when you contribute towards your RRSPs the 1st time), but this also means that even if your contribution room is $0 you can still put money back under the Home Buyers Plan.

    I like to think of it as an “interest free loan to yourself”... you can borrow the savings from your RRSPs and pay yourself back – interest free – and take up to 15 years to do so. If you borrow the maximum $25,000, your monthly payments would be approximately $140 per month; $20,000 is $111/month, $15,000 is $83/month, etc.

    What happens if you don’t put the money back? If you don’t repay the money you will have that 1/15 added to your income for tax purposes each year because all money that is fully withdrawn from an RRSP is considered taxable income.

    What else should be considered? The money in your RRSP grows tax free so long as it is inside that plan. This will be given up from the time it is withdrawn to the time it’s returned (so you’re losing out on the interest within the RRSP however you’re investing it in real estate, so it’s still likely to increase in value over the years!).

    If you are concerned that you won’t be able to put back the 1/15 then you need to be prepared for additional tax. If those monthly repayments, on top of your mortgage, are big enough to keep you up at night talk to your financial advisor and mortgage specialist (me!) for alternatives.

    Billie 604 910 0443 or billie.mesiano@td.com

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