With increasing home prices it can be overwhelming to think about saving the minimum 5% downpayment required to qualify for a mortgage.
With the Home Buyers Plan an RRSP is a great vehicle to capitalize on some perks that help accelerate this process. Why not take advantage of some double dipping.
Now is a great time to review this as we have until February 28, 2018 to max out our contributions for 2017.
First let’s look at how RRSP contributions work?
- Contribution limits are calculated at 18% of the prior year’s reported earned income.
- RRSP contributions within the first 60 days of the tax year may also be used as deduction for the previous tax year. The savings depend on the tax bracket.
- Some employers will match contributions or even offer a group RRSP plan. Take advantage of it!
How does the Home Buyers Plan work?
- A borrower can borrow up to $25000.00 single or $50000/couple tax free from one’s RRSP for a downpayment as long as one hasn’t been a home-owner for five years.
- The funds have to stay in the RRSP for 90 days before withdrawal.
How can you make the most of it?
- Some employers match contributions or offer group RRSP plans . Can you say free money? Take advantage of it!
- You increase your savings by increasing your tax refund and either add it to the RRSP or pay down an RRSP loan. Take advantage of it!
- RRSP loans can be used to maximize your contribution and tax savings.
Example: Fast-tracking your downpayment with a $5000 RRSP loan. Borrower with 32% tax bracket makes $250/month RRSP contribution. Employer matches contribution 1:1.
- $8000 Yearly contribution by borrower
- $3000 Yearly matched employer contribution (this could vary depending on the employers cap on contribution)
- $11,000 Total RRSP balance
- $5000 RRSP loan
- $2560 Tax savings applied as RRSP loan payment
- $2440 remaining RRSP loan balance
You will save up for a downpayment a lot quicker than with a regular savings account. This strategy might help to become a homeowner sooner.
What if you also got a $5000 gift from a parent on top of this to help you out? $16000 as a 5% downpayment could put you into a $320000 purchase oac.
What if you and your spouse both did this? $22,000 as a 5% downpayment could put you into a $440000 purchase oac.
Maybe you are closer to qualifying for a mortgage than you think. Let’s have a conversation!
Don’t leave money on the table!
It is important to seek advice from licensed professionals (financial planner, accountant, mortgage broker) for your own scenarios.