March 1 is coming up fast. For a lot of Canadians, this time of year signals the end of their Registered Retirement Savings Plan (RRSP) contribution period for last year’s tax season. For many Canadians, putting money into an RRSP can be a step towards one of the biggest purchases they will ever make — their first home.
A first-time home buyer in Canada can withdraw up to $25,000 from their RRSP to help with the down payment on a home purchase through the Government of Canada’s Home Buyer’s Plan. Why is an RRSP the best go-to- for a first-time home buyer’s down payment when the actual purpose of an RRSP is to save for retirement?
There are a lot of different factors to consider when you start saving for your first home. We can help give you a good running start by helping you decide where best to start saving for your down payment.
Going for an RRSP?
The main appeal of using an RRSP to save for your first home is the Government of Canada’s Home Buyer’s Plan. This is essentially one of the only situations where pulling money from your RRSP won’t result in any tax penalties. If you’ve been saving into an RRSP for a long time, it could make a lot of sense to draw your down payment from here. This especially makes sense if you pay into another pension plan either on your own or through your employer. This way, you still have money regularly going towards retirement that will remain untouched.
There is a catch, however, in using your RRSP for a down payment on a home: it is technically a loan. The part of the Home Buyer’s Plan that’s often overlooked is that the money taken out from the RRSP does need to be paid back into your RRSP, or you’ll face the same tax penalty of a normal pre-retirement RRSP withdrawal. First-time home buyers have 15 years to top up their RRSPs with what they used for their home purchase, which is typically more than enough time.
The maximum amount that a first-time home buyer is allowed to withdraw under the Home Buyer’s Plan is also only $25,000, which might be a smaller percentage of your home’s value depending on where in Canada you’re looking to buy.
The ideal situation for a down payment is 20 per cent of the home’s total value, but first-time home buyers have the option of only putting down five per cent and adding Canada Mortgage and Housing Corporation (CMHC) insurance to their total mortgage. Putting down only five per cent makes the $25,000 a little more realistic for a down payment but adding the CMHC insurance is extra money on your mortgage that won’t be equity for you in the long run.
Maybe a TFSA works best?
Since the Government of Canada introduced Tax-Free Savings Accounts (TFSA) in 2009, millions of Canadians have opened one and started a savings plan. There’s a lot more flexibility in holding a TFSA than there is in an RRSP, mainly around how often you can withdraw. Where RRSPs only let you withdraw under specific circumstances, TFSAs let you withdraw any time you want.
TFSAs build interest over time, which means that your money ends up making a little extra while being saved and that interest can build up over time making your savings worth a whole lot more. Motive Financial offers some of the highest interest rates on TFSAs in Canada. And all of those high interest rewards remain tax-free even after you withdraw from your account.
One consideration for a TFSA is that no one can hold one until they’re 18. Canadians can open and contribute to an RRSP at any age, so many who do use their RRSPs for a down payment may have been contributing to it for most of their lives. If you open a TFSA and contribute a lot, you’ll be able to build your down payment goal quickly and see some rewards from your investment.
It’s hard to know what’s the best way to save for your first home and it’s always best to discuss your options with a financial advisor before making any major decisions. RRSPs, TFSAs with Motive Financial are a good place to start with meeting your homeownership goals.