Using your RRSP as a first-time home buyer: advantages and disadvantages

 

For first-time home buyers, it can feel intimidating when you want to try and buy a home. Beyond the work of seeing houses and facing competition in the market, you also simply need to have enough money saved to cover your down payment. Many first-time buyers are younger and haven't had as much time to save or reach their high-earning years in their careers, making even a minimum down payment feel out of reach.

Making enough money for a home will never be easy, but luckily there are some programs to help make it at least a little bit easier for first-time home buyers. One popular program is the Home Buyers’ Plan (HBP), which allows buyers to collect tax savings using their Registered Retirement Savings Plan (RRSP) to fund a home purchase.

The HBP is undoubtedly not a bad option, and many Canadians have used it to help buy their first home. However, it may not be for everyone. You need to be aware of some downsides before you withdraw money from your RRSP to buy a house.

In this article, we will explore funding a home purchase with your RRSP, how it works, and look at some of the advantages and disadvantages of using the Home Buyers’ Plan to buy your first house.

What is an RRSP?

Before you can understand the Home Buyers’ Plan, you need to know how your RRSP works. Hopefully, if you have been contributing to your RRSP, you already know this, but maybe you haven't begun using an RRSP yet or need a refresher.

In brief, your Registered Retirement Savings Plan (RRSP) is a tax-deferred retirement savings account, so any RRSP contributions you make for the year are deducted from what you owe on taxes. An RRSP is not truly tax-free, as you will need to pay taxes when it comes time to withdraw the money you have saved.

You also will not be taxed on any capital gains made within the account, such as through investments, as long as the gains remain within the account. The idea is to help Canadians save money while they are in their prime earning years while also getting a tax break and then withdraw it in retirement when your marginal tax rate is lower.

As long as your RRSP isn’t locked-in, you can still withdraw the money whenever you want, but you will simply need to pay taxes on the amount like any other income. You will also lose any contribution room used when you put the money into the account.

RRSPs are one of Canada's most popular registered accounts, so many people have a lot of money saved within one. If you are many years from retirement, it can be tempting to dip into a bit of that money, especially if you want to buy a house. Luckily, the CRA provides you with an option to do just that.

What is the RRSP Home Buyers’ Plan?

The Home Buyer's Plan is a federal program designed to help Canadians buy their first home with funds from their RRSP. Under the home buyers plan, you can use money from your RRSP while still enjoying the tax savings. However, there are some significant limitations to this option.

How much you can withdraw

First, your withdrawal under the home buyer's plan is limited to $35,000 per buyer. Your spouse may also withdraw that amount for the same home purchase, allowing you up to $70,000 for your down payment. You also need to have saved that money in the first place unless you choose to go with an RRSP loan.

The amount you withdraw does not incur any taxes and can be put toward a home purchase.  When withdrawing money through your Home Buyers’ plan, you will need to provide your financial institution with a T1036 form indicating the purpose of the withdrawal. Otherwise, it may not count towards your HBP loan, and you may end up paying tax on the money you take out.

Repayment rules

Using the home buyers plan, you have 15 years to pay back the amount, with a one-year grace period before repayment starts. You will not need to pay interest, and because the value of the loan and the repayment period are fixed, you will have the same yearly payment for the entire 15 years. If you withdrew the maximum amount under the home buyers plan, you would pay about $2,333 per year for 15 years or around $194 per month on top of your mortgage.

Paying your Home Buyers plan loan will not affect your RRSP contribution limit, as the money has already technically been contributed. This means you can still contribute your yearly amount on top of your loan repayment. However, any amount you repay on the loan is not deductible, as you already saved the tax on those dollars when you first contributed them to your RRSP.

The penalty for missed repayment on a Home Buyers plan loan is not very severe. When you fail to make a payment towards your Home Buyers plan loan, the missed payment amount will simply be treated as any other withdrawal from an RRSP and will be counted as taxable income for the year. Your principal still goes down, and you will simply owe more come tax season.

Also, be sure to designate any repayments as such, or you risk the Canada revenue agency counting it as a regular contribution. This can lead to you missing your payment and potentially exceeding your contribution limit.

Who is qualified for the Home Buyers’ plan?

To take advantage of the Home Buyers’ Plan, you must meet some qualifying criteria. First and most obviously, you will need to be a first-time home buyer, meaning you or your spouse have not owned a home in the last four years.

You will need to be a Canadian citizen or permanent resident, and you will need to withdraw funds all at once or in multiple installments within a single calendar year. You must use the money for a home purchase, so you can't spend it on just whatever you want. The funds you withdraw must also be in your RRSP account for 90 days prior to withdrawal, which will be essential to know if you are borrowing or being gifted money into your RRSP.

You must also occupy the home you plan to buy, so you can't use the Home Buyers Plan to buy an investment property you won't live in.

Advantages of using the Home Buyers Plan

There are clear advantages to using the Home Buyer's Plan to buy a home.

For one, it allows you to save income tax on a significant amount of your down payment, which can mean a lot of extra money in your pocket. It is also an interest-free loan, meaning the amount you borrow is the amount you will pay without any added costs. Finally, you have a long time to pay it back, meaning not only is the financial impact spread out, but you also still get to have that money in your RRSP when it comes time to retire.

Disadvantages to using the Home Buyers Plan

Savings required

One of the biggest issues with using the Home Buyer's Plan is that it requires a significant amount of savings to be most beneficial. Those with an extra $35,000 saved can make the most of the Home Buyers’ Plan. The higher your income, the more you can save, and your income tax rate will be higher, making the HBP's advantages even greater. However, for those who make less and save less, the benefits of the Home Buyers’ Plan will be reduced.

Long term loan

The Home Buyers’ Plan repayment is fixed at 15 years, meaning you commit yourself to a long-term loan repayment schedule. This means 15 years of increased home costs and 15 years when you could potentially miss your repayment and be charged taxes.

This may also be a problem if you plan to retire and use your RRSP within 15 years. The one upside is that you can prepay early for no penalty.

Missing out on RRSP income

Saving into your RRSP is one thing, but making the most of it is another. Many people choose to invest in their RRSP. When it comes to investing, it's always best to have as much as possible as early as possible to take advantage of compound interest. Though retirement may seem far away, the number of years until you retire are limited, and every year counts in investment growth.

By taking $35,000 out of your RRSP, you miss out on the potential growth of that money if it were invested. Though it will be back in your account after 15 years, that's 15 years you missed out on investment growth. On the other hand, this money is technically being invested in your home, so you may still see some returns. This is not necessarily a downside, but you must consider where your money is best spent based on your expected investment returns and personal goals.

Repaying your Home Buyer's Plan loan may also limit your ability to continue contributing to your RRSP further, leading to years of playing catch up. In this case, you would also be missing out on the tax benefits of the RRSP for future years.

Is it right for me?

Though there are downsides to using the Home Buyer’s Plan to borrow from your RRSP, they are far from deal-breakers. The Home Buyers plan will not be for everyone, but it is an excellent option for some. The person who will get the most out of the home buyers plan is anyone with a large amount of savings already in their RRSP and who makes a significant income.

This means that you will be able to withdraw the maximum amount and benefit most from the tax savings of having contributed. In addition, a high income will help with repayment and allow you to contribute at the same time, allowing you to continue making tax deductions.

As your savings amount and income go down, so does the feasibility of the Home Buyers’ Plan. However, it may still be a good idea if you expect your income to increase in the coming years. You can save the taxes now, and your loan will become even easier to service over time, meaning there are few downsides if you keep on top of your payment schedule.

Suppose you are deciding between using the Home Buyers’ Plan or withdrawing directly from your RRSP and paying the tax. In that case, it will be in your best interest to use the HBP as you can retain the contribution room by repaying the plan, which is not an option with a straight withdrawal.

If you are considering using the Home Buyers’ Plan for your first home purchase, consider talking to a tax professional or financial advisor. They can offer you a more in-depth understanding of how the program can benefit your particular financial situation.

Are you looking to buy or sell property? If you’d like, we can have a real estate expert show you the most efficient process that saves you thousands of dollars, a lot of time, with little or no inconvenience to you. Contact us today!

Source:  Canadian Real Estate Wealth

 

A new report shows just how much home values have increased in parts of the Lower Mainland since the onset of the COVID-19 pandemic.

While prices in Vancouver-proper rose by 18 per cent, new data from Properly shows the rate was more than twice that in a number of other cities and suburbs. The report compares prices in mid-2020 with currently-estimated values.

A new report shows just how much home values have increased in parts of the Lower Mainland since the onset of the COVID-19 pandemic.

While prices in Vancouver-proper rose by 18 per cent, new data from Properly shows the rate was more than twice that in a number of other cities and suburbs. The report compares prices in mid-2020 with currently-estimated values.

"While all properties increased in value during this period, homes in the suburbs appreciated a lot more than others during the pandemic," the report says.

Leading the pack on the Lower Mainland was Maple Ridge, where the median home price appreciated 49 per cent.

Ladner and Squamish were tied for second place at 40 per cent. In Squamish that meant an increase to an average price of $1.36 million.

Next in line were Pitt Meadows at 39 per cent and Port Coquitlam at 37 per cent.

Significant jumps were also seen in Burnaby and Richmond.

In the first case, the median price rose 29 per cent, from about $730,000 to around $865,000. In the second, there was a 25 per cent jump from $768,000 to $958,500.

The move away from the urban core was a trend in B.C. and beyond, particularly during the early days of the pandemic, the report notes.

"A lot of people living in city centres—many of whom were confined to small apartments 24/7 because of isolation requirements—desired more space, larger lots, and greater access to outdoor activities. This increased demand in the suburbs," it explains.

"But as restrictions were lifted, this demand reversed. People once again value living in the city, as it puts them in closer proximity to friends, events, nightlife, and other activities."

According to Properly, the Fraser Valley has seen a 14.6 per cent decrease in values since the peak in February of 2022. In the rest of Greater Vancouver, prices have remained relatively unchanged, dropping by less than one per cent.

Are you looking to buy or sell property? If you’d like, we can have a real estate expert show you the most efficient process that saves you thousands of dollars, a lot of time, with little or no inconvenience to you. Contact us today!

 Source:  CTC News Vancouver

A new park in Richmond officially opens to the public this week

 

The new park features pathways for pedestrians and bikes, a basketball court, table tennis and an off-leash dog park.

Just in time for the warmest months, Richmond's Alexandra Neighbourhood Park officially opens. 

On Monday, Richmondites who live near by found the fence, which had cordoned off the area, removed. 

"I feel excited and I can't wait to walk my dog there since the new park has an off-leash dog park," said a local Richmondite. "It's great news for many dog owners live in the Alexandra neighbourhood."

​According to the city's website, the new park on Odlin Road features pathways for pedestrians and bikes, a basketball court, table tennis, an off-leash dog park, and a seasonal rain garden.

The Richmond News earlier reported that the park will be equipped with new recreational amenities for families living in the Alexandra neighbourhood, after receiving a provincial grant of $1 million. 

Andrea Lee, a city spokesperson, said several booths will be set up around the park next Wednesday featuring a variety of upcoming activities, such as an urban wildlife talk and a tour of the Alexandra District Energy Building. 

The park will also be a link between the north and south portions of the Alexandra Greenway, a mixed-use path along a green belt traversing the neighbourhood. 

The city will host a grand opening with the mayor and councillors next Wednesday from 1 p.m. to 3 p.m. Everyone is welcome to attend. 

Are you looking to buy or sell If you’d like, we can have a real estate expert show you the most efficient process that saves you thousands of dollars, a lot of time, with little or no inconvenience to you. Contact us today!

Source:  Richmond News

Here’s how to take advantage of the housing market chill as a first-time millennial buyer

 

Calculate how much a down payment will be, then set up a savings schedule that is co-ordinated with your paydays

Are visions of owning coming back into your sights again as the housing market chills out a little? Follow these money tips if buying is in your near-ish future.

Trim your budget busters pronto

Now is not the time for food waste, unnecessary subscriptions and impulse buying. Go through your spending line by line and find your most important priorities for spending. If it’s super important (and makes you happy), keep it. If it’s not, reallocate that money toward savings towards that eventual home purchase and paying off consumer debt. You won’t want to be balancing a mortgage alongside credit card balances. If you’re not yet putting 10 per cent of your take home pay toward clearing debt, it’s time to make that happen, too. You’ll be pleased that your credit score will also improve as you make progress on your debts, and a higher score could help land you a better rate in the mortgage approval process, according to NerdWallet.

Start saving for your down payment much sooner than you think

Calculate how much a 10 to 20 per cent down payment will be, then set up a savings schedule that is co-ordinated with your paydays. That might mean putting $500 or $1,000 per paycheque into a safe cashable GIC or a high-interest savings account tucked within your TFSA, RRSP or eventually the new tax-Free First Home Savings Account (FHSA), which was recently introduced by the Liberal government; rates have gone up on savings accounts and GICs.

Saving a down payment takes time so set a savings goal of up to five years to raise the money. Anything further out than that timeline gets a bit blurry and hard to plan for.

Get creative if you’re buying into an aggressively priced market

Most millennial buyers cannot afford their dream home right away, unless they are getting assistance from family, which I highly encourage if it’s possible. But, by getting your foot in the door with a smaller condo or townhouse in a great location, you can start building up equity and move to your dream home later down the road. It’s OK to shift your vision to a lower price point.

You can also look for income potential with your purchase, like a rental suite, an extra parking stall or storage space. By generating income from the property you can better manage your cash flow, pay off your mortgage faster and possibly allocate more savings towards retirement. There are downsides to take into account like the fact that you’ll be on call 24/7 if something goes wrong like a burst pipe.

According to a recent poll by The Star it’s becoming more common for millennial and Gen Z buyers to buy with friends and family to help share the costs, and also to get the support of a co-signer to help qualify for the mortgage. Just be aware these relationships can have strings attached, so clear up how these non-traditional arrangements are going to work before you sign on the dotted line.

Protect yourself now and as a future homeowner

There are two ways to protect yourself and your family for eventual home ownership. First, have life insurance. According to RBC Insurance there are two myths out there that first; life insurance is way too expensive (it’s actually much more affordable than you might think and the younger you are, the cheaper it is); and second; that you might not need it if you don’t have kids. But if you’re a millennial, I know your age, and know you have some assets and debts which means I can almost guarantee you need it by this point in your life. So, fit it into your budget even if you have to trim from somewhere else.

The second way to protect yourself is to have a rainy-day fund so that in an emergency, you have something to fall back on. It takes time to build this up, so stick with it with regular contributions each pay.

There’s not much you can do about rising rates and high inflation, so focus on what you can control. My final three concluding tips for soon-to-be-buyers are; 1) Don’t buy too much house. This can leave you house rich but cash poor with little money to save, let alone have fun. 2) Don’t forget to budget for closing costs. Budget 1.5 to 4 per cent of your home’s purchase price towards closing costs, such as home inspection, land transfer tax and real estate lawyer fees. 3) Set your mortgage-free date (for many this is 25 years out, but it could be sooner).

Are you looking to buy or sell property? If you’d like, we can have a real estate expert show you the most efficient process that saves you thousands of dollars, a lot of time, with little or no inconvenience to you. Contact us today!

 Source:  Toronto Star

Commercial Real Estate Report (Canada 2022)

 

Demand for commercial properties soars nationwide amidst economic expansion and stock market volatility, according to RE/MAX® Canada Brokers

 Investors flock to ‘bricks and mortar’ as hedge against inflation in Q1 2022

With North American stock markets dangerously close to correction, bricks-and-mortar commercial real estate continues to resonate with institutional and private investors, particularly those who are personally vested, across almost every commercial asset class in major Canadian centres, say RE/MAX brokers.

The RE/MAX Canada 2022 Commercial Real Estate Report found demand for industrial, multi-unit residential—particularly purpose-built rentals—and farmland was unprecedented in the first quarter of 2022, with values hitting record levels, while retail and office are starting to show signs of growth in multiple markets.

 DOWNLOAD THE FULL REPORT

 Commercial Real Estate Report Highlights

The report examined 12 major Canadian centres from Metro Vancouver to St. John’s. Regional highlights include the following:

• 92 per cent of markets surveyed (11/12) reported extremely tight market conditions for industrial product in the first quarter of 2022. Newfoundland-Labrador was the only outlier.
• 67 per cent of markets surveyed (8/12) found challenges leasing industrial space. Included in the mix were Vancouver, Edmonton, Calgary, Winnipeg, Ottawa, the Greater Toronto Area, Hamilton-Burlington-Niagara and London. Some realtors are recommending tenants start their search for new premises at least 18 months before their current leases come up for renegotiation.
• While demand for overall office space in the core remains relatively soft in 92 per cent of markets (11/12) across the country, Metro Vancouver continues to buck the trend.
• Suburban office space continues to prove exceptionally resilient in 67 per cent of markets surveyed (8/12). Those markets include Vancouver, Calgary, Saskatoon, Winnipeg, Hamilton-Burlington-Niagara, Ottawa, Halifax-Dartmouth and Newfoundland-Labrador.
• Development land remained sought after (industrial/residential) in 67 per cent of markets surveyed (8/12) including Vancouver, Calgary, Regina, Saskatoon, Winnipeg, Ottawa, the Greater Toronto Area and Halifax-Dartmouth.
• End users are encountering challenges in terms of expanding their businesses due to land constraints/shortages, with specific mentions of this noted in Vancouver, the Greater Toronto Area and Regina.
• Retail is on the rebound in 75 per cent of major Canadian markets (9/12), with strong emphasis on prime locations in neighbourhood microcosms. The trend has been identified in Vancouver, Edmonton, Calgary, Saskatoon, Regina, Winnipeg, Hamilton-Burlington-Niagara, Toronto and Ottawa.

“The overall strength of the Canadian economy continues to propel massive expansion in commercial markets across the country in 2022,” says Christopher Alexander, President, RE/MAX Canada. “What began as heightened demand for industrial space to accommodate a growing e-commerce platform during the pandemic has blossomed into a full-blown distribution and logistics network that encompasses millions of square feet in markets across the country. Recent volatility in the stock markets has also prompted a shift to greater investment in the commercial segment as investors look to real estate as a hedge against inflation.”

Given the current shortage of land/space, commercial real estate developers and end users looking to build, have become increasingly creative in 58 per cent of markets surveyed (7/12), including Metro Vancouver, Edmonton, Regina, Saskatoon, Winnipeg, London and the Greater Toronto Area. The supply/demand crunch has proven the adage, ‘necessity is the mother of ingenuity,’ as new solutions emerge in the marketplace. In Metro Vancouver, Oxford Properties introduced the first industrial multi-storey industrial/commercial space in 2019 and a second stratified multi-storey facility—Framework by Alliance Partners—is planned for False Creek Flats. The first building is nearing completion and leased to Amazon while the first and second phase of the False Creek development is sold out and a third phase is currently selling at $725 per square foot.

In the future, municipalities may also consider industrial land reserves, registered areas dedicated to industrial in municipalities that are experiencing land constraints, given overwhelming demand.

 “Land development is pushing city boundaries in major centres and municipalities are scrambling to accommodate residential and industrial intensification,” says Alexander. “At present the process is painfully slow in most centres, even where land is already serviced. Given the on-going likelihood of demand, policy that helps availability or fast-tracking of approvals would certainly be a boon to the market.” 

The RE/MAX Canada 2022 Commercial Real Estate Report also identified a growing trend in infill land assembly that targets retail storefront/strip retail malls in mature areas for mixed-use developments by institutional and private investors. These new developments almost always have a residential housing component on top, often purpose-built rentals or condominiums, given the shortage and need for greater densification. Smaller investors and end users are largely shut out of this market and tenants are having difficulties securing long-term leases in these key areas. Canada Mortgage and Housing Corp. (CMHC) is offering an exceptionally attractive financing package for multi-unit, purpose-built residential construction, with a 50-year-amortization rate, low loan-to-value ratios, and favourable interest rates.

Institutional and private investors remain exceptionally active in the commercial real estate market across the country, spurring demand for industrial/office/retail product on a large-scale basis. Extensive portfolios are a primary target, especially those containing 10 or more properties. Spillover from activity in major centres is also serving to bolster smaller, secondary markets, where affordable price points, in relative terms, prove attractive, especially as savvy investors anticipate future needs and potential, given urban sprawl, density, population growth, pricing and inventory trends. 

While retail is making a comeback in prime neighbourhoods, the return of foot traffic should have a positive impact on the market moving forward. Revitalization of older retail spaces and malls is underway to enhance the shopper experience and influence the return to in-person shopping. This, in turn, is attracting tenants. The sector is expected to continue to strengthen as markets move past former pandemic constraints and more favourable conditions emerge to support retail growth.

RE/MAX Canada has found that cannabis outlets are largely over-represented in most major Canadian centres. As the industry amalgamates, there could be an influx of retail inventory returned to the market over the next 12 to 18 months.

Other trends noted in the commercial market by RE/MAX Brokers include novel ways to expand exposure and streamline the selling process. As inventory of farmland dwindles and price per acre has risen, realtors have turned to auctions with great success in Saskatchewan. Saskatoon, for example, which typically has about 300 listings for grain farms for sale at this time of the year, has seen available properties drop to below 90. Realtors have turned to auctions as a more effective way to increase exposure to a wider audience, generating offers from across the country, as well as the US. The trend is another sign of a heated marketplace where buyers are willing to compete for the right product in the right location in a transparent process.

 “The soaring price of commodities has bolstered Western Canadian markets, with resource-rich provinces such as Saskatchewan, Alberta, and Manitoba experiencing unprecedented growth as industries emerge from their slumber,” says Elton Ash, Executive Vice President, RE/MAX Canada. “Saskatchewan, in particular, is reinvigorated, with the economic engine just heating up in agriculture, mining, forestry, and potash.”

Continued strength is forecast in commercial markets, supported by population growth and further economic expansion. According to the RBC Economics, Provincial Outlook published in March, GDP growth is expected to climb to 4.3 per cent in Canada, led by BC, Saskatchewan and Alberta in 2022. An unquenchable demand for product in the industrial, multi-unit residential and farmland sectors will persist as intentions remain strong, despite a serious scarcity of inventory. Buyers, large and small, will continue to seek opportunity as investors increasingly favour tangible assets. Dollar volume is up across the country in almost every market as the principals of supply and demand impact values. Lease rates are also edging upward. With the pandemic fading quickly from memory, the return to the workplace—either full-time or in a blended/hybrid format—is expected to spark the next wave of growth, revitalizing downtown office buildings and breathing new life into the core.

Are you looking to buy or sell property? If you’d like, we can have a real estate expert show you the most efficient process that saves you thousands of dollars, a lot of time, with little or no inconvenience to you. Contact us today!

Source:  RE/MAX