HBP (Home Buyer’s Plan) is a powerful tax tool available to first time home buyers to maximize down payment. You are considered a first time buyer if you have not owned a property over the last five years. The principle is pretty simple: you are allowed to withdraw up to 25000$ of your RRSP’s without being taxed when you buy your first property. After a one year break, you must re-contribute the amount withdrawn to your RRSP’s over 15 years. The amounts re-contributed to your RRSP will generate income as soon as re-contributed.
The HBP advantage is that you get the tax savings right now, but still can use the funds to buy the property.
Funds withdrawn trough HBP are not necessarily required to be used for the down payment. You can also use the funds to buy new furniture or to pay the welcome tax, etc… Also note that funds must be injected in the RRSP at least 90 days before the HBP withdrawal and must be withdrawn no more than 30 days after you buy the property. It is important that you consult your fiscal expert to adequately plan for the HBP.
To maximize the benefits of that tax tool, it is possible to borrow the funds for the RRSP contribution. This strategy has been proven to be very worthwhile. The following are three different variations that can be used. Consult your professional to determine which one is the best for you. A 40% marginal tax bracket is assumed in these strategies.
RRSP loan strategy #1
Borrow 25 000$ through an RRSP catch-up loan. Use the tax refund from your RRSP contribution to reimburse part of the RRSP loan and use the HBP withdrawal for your down payment.
Result: You will have a down payment of 25 000$ for your home purchase, while your RRSP loan will only be 15 000$ (initial loan of 25 000$ minus tax return of 40% of 25 000$).
RRSP loan strategy #2
Borrow 25 000$ through an RRSP catch-up loan. Use the tax return for your down payment and reimburse in full the RRSP catch-up loan with the HBP withdrawal.
Result: You will have 10 000$ for your down payment and no remaining RRSP loan.
RRSP loan strategy #3
Borrow 25 000$ through an RRSP catch-up loan. Use the tax return and the HBP withdrawal for your down payment.
Result: You will have an available down payment of 35 000$ (tax return of 10 000$ plus HBP withdrawal of 25 000$) while your RRSP loan of 25 000$ will remain.
The choice of the strategy that best suits your needs depends on many factors, including your specific situation. One factor to consider is the mortgage insurance premium when purchasing a home. For properties purchased with less than 20% down payment, mortgage insurance is mandatory. CMHC (Canada Mortgage and Housing Corporation) is the most known of these insurers. Since the premium paid is inversely related to the down payment amount, it can be very worthwhile to use one of the aforementioned strategies. The result may be a lower mortgage insurance premium or none at all. Once again, consult with your fiscal expert to calculate the potential savings.
Furthermore, when determining the size of your down payment, considerations should be made to your projected rate of return on investments compared to the interest rate of your mortgage. If your investments yield a strong return, it can be better to invest your money and take a higher mortgage at a lower interest rate.
In conclusion, we are available to help you maximize your strategies. Do not hesitate to contact us for any questions!
Nicolas Godbout, tax planning professional and financial specialist