Thanks for stopping by, today, we’re going to talk about three different strategies that will help you to increase your down payment:
1. First, I’ll show you how you can deposit part of your down payment into your RRSPs, then take it back out to purchase your first home and get the government to give you $11,000 per person.
2. Next, I’ll introduce you to the option of taking out an RRSP Loan. For example, if you only have $20,000, as a couple, to buy a house, I’ll show you how you can turn that $20,000 into $40,000 by getting the bank and the government to fund the rest. (This strategy will only cost you $150-$300)
3. Last, I’ll talk to you about the Peel Affordable Home Ownership Program. If you don’t live in Peel, there may be still be a different program available in your area. If this is something that interests you, give me a call and I’d be happy to see if there is one available in your area.
Now, before we get into each of these strategies, you need to understand some of the basics of an RRSP, which is a Registered Retirement Savings Plan. Its purpose is for you to save for your retirement, but you can also use it to purchase your first home by withdrawing up to $25,000 from it. The main benefit of this plan is that you get a tax rebate for every dollar you put into this plan.
Let's say your income is $60,000 and you put $10,000 into your RRSP, when you file your tax return, the government will give you a tax rebate of $2,965, which is roughly a 30% tax rebate. Now, the higher your income, the higher your tax refund and, of course the lower your income, the lower your tax refund.
Here are some of the main criteria to qualify for this program:
· You must be a Canadian resident;
· You should be a first-time homebuyer; however
· If you have not owned a home in Canada in the last four calendar years, you may still be eligible.
1) The Best Way to Deposit Money into your RRSP's
To put this into context, I’m going to create a fictitious couple, based on real life examples that I have seen in the past, both as a banker and a realtor. We’ll call them Mario and Princess.
Mario and Princess are newlyweds with an annual income of $65,000 each, and $50,000
to put towards the down payment on their first home. They currently have no RRSPs, and they’ve never owned a home in their lifetime. I’d suggest that Mario and Princess each deposit $25,000 into their respective RRSPs. When they file their tax return, they will both get roughly $7,000 in their tax return, which is collectively about $14,000.
Mario and Princess can withdraw the $50,000 from their RRSP 90 days later without any penalties, but only to purchase your first home. With the $14,000 they received through their tax returns, we have increased their down payment from $50,000 to about $64,000.
Now remember, the higher your income, the higher your tax refund. Let's say Mario and Princess each earn $120,000 instead of $65,000. If their income is $120,000 and they both deposit $25,000 into their RRSPs, they’ll get about $11,000 back from the government, which collectively is about $22,000. Now, instead of having $50,000, they have approximately $72,000 to purchase their first home.
2) RRSP Loan Option and how to Utilize it to get the Maximum Refund
The main question I’ll address here is how you can maximize the first-time home buyers plan. Between you and your spouse, you have $20,000 saved, and you’re ready to purchase your first home. Now as long as you can qualify for the mortgage, you technically only need to put a down payment of 5% of the purchase price, and your closing costs. $20,000 would be considered a 5% down payment on a $400,000 home, which means you can purchase a home worth $400,000, but I will help you increase that by discussing the RRSP Loan option.
Here are some of the basics of an RRSP Loan:
· It’s a loan that the bank gives you to deposit money to your RRSPs and they hold this money as collateral until you pay off the loan.
· Usually, they will charge anywhere between Prime to Prime Plus One, which is about 4-4.5% in January of 2018.
· Most banks will allow you to defer the monthly payments for up to six months, which means you do not have to make any monthly installments on this loan.
· In my strategy, you will take out the loan for 90-120 days; you shouldn’t actually need it for longer than that.
Once again, I’ll use Mario and Princess to explain this a little bit better.
In this example, Mario and Princess have $20,000 as a down payment. They want to fully capitalize on the First Time Home Buyers plan. They both checked their notice of assessment and found out they have sufficient room available to maximize their homebuyers plan. You should always check your notice of assessment before depositing any money into your RRSPs, because you need to make sure you have sufficient room available.
Going back to our couple, let's say they split the $20,000 they have, and they deposit $10,000 each from their savings account into their RRSPs. They’ll each still need an additional $15,000, so we’re going to ask the bank to provide a loan for that amount.
Mario and Princess are each earning $65,000; if they deposit $10,000 from their savings account into their RRSPs, and they get the loan for $15,000, this makes a total of $25,000 that they will deposit into their RRSPs. Once they file their tax return, they will get a tax refund of $6,998 each, which makes a total rebate of $14,000. They’ve increased their down payment from $20,000 to $34,000. Nice chunk of money!
Let’s do the same thing assuming that Mario and Princess are making $120,000. If they follow the same path, depositing $10,000 from their savings into their RRSPs, and getting a loan for $15,000, technically their tax refund will be close to $11,000 each, which makes it $21,704. Now they’ve increased their down payment from $20,000 to $41,700.
A) Cost of an RRSP Loan
Now, you’re probably wondering, how much will the bank charge you for this type of loan? In fact, it’s quite cheap. Mario and Princess are borrowing $15,000. Based on a 4% interest rate, this will work out to be $50 monthly. As I said earlier, you only need this loan for 90 days, or three months. This works out to $150 per person, or $300 per couple.
B) RRSP's Payback and how it works
The money you withdraw from your RRSPs needs to be put back into your RRSPs. Here’s how it works. If you withdrew $25,000, the government will give you a two-year grace period, which means you don’t need to make any monthly payments or any payments into your RRSPs. It’s practically a loan you give to yourself.
Following the grace period, you would need to deposit the amount you withdrew, divided by 15—the number of years you have to pay back the loan. If you withdrew $25,000, you would need to deposit $1666 per year for the next 15 years into your RRSPs. If you do not, that amount is added as income when you file your taxes, and you have to pay taxes on that. If your income was $40,000, an additional $1,666 would be added, making your annual income $41,666 for the purpose of your tax filing and you pay a little bit of taxes on that.
Third strategy - Peel Affordable Home Ownership Program
3) Peel Affordable Home Ownership Program
The Peel Affordable Home Ownership Program is designed to provide low-to-moderate income residents who are currently renting a unit in the region of Peel, which consists of Brampton, Caledon, and Mississauga, the opportunity to qualify for a loan assistance program to purchase a home, but only in the Peel region. Approved applicants can get up to $20,000 in down payment assistance. The program will basically assist eligible applicants that will have a total gross family income of $87,800 or less to purchase or resell a home in the region of Peel. However, the purchase price of the home you buy cannot exceed $330,000. This is based upon rules that were set in 2017. The 2018 rules have not yet been released.
This program takes place between March and May every year and it is available on a first-come first-serve basis. It’s important to have your applications and all documents ready beforehand to ensure that you’re at the front of the line when enrolment opens. You must have a mortgage pre-approval with your application, otherwise they your application will not be considered.
So these are the three strategies I have for you today. If you have any questions about anything I’ve shared here, I’m just a phone call (416 994 0188) or an email info@manojkukreja.com away. Thanks for your time today and I look forward to hearing from you!
I want to let you know that what I discussed here is very specific to First-time homebuyers and it’s a very high-level overview of the different strategies available to you. It’s important to remember that should always talk to an accountant, a financial planner or your bankers before you implement any of these strategies on your own. If you have any questions or concerns, always feel free to give us a call.
Important Links
Peel Affordable Home Ownership Program Full Details
https://www.peelregion.ca/housing/home-in-peel/apply/qualifications.htm
Ernst & Young Tax Calculator
http://www.ey.com/ca/en/services/tax/tax-calculators-2018-personal-tax
Ernst & Young RRSP Savings Calculator
http://www.ey.com/ca/en/services/tax/tax-calculators-2017-rrsp-savings
Full Details on RRSP's
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/registered-retirement-savings-plan-rrsp.html