Today’s real estate market is more challenging than ever for first-time home buyers. Nevertheless, owning a house remains a financially sound investment, not to mention a milestone to celebrate and take pride in.
All of the benefits of homeownership aside, some people just have trouble imagining that they can ever make it happen for themselves. Incomes and savings have limits, and coming up with a down payment can seem insurmountable.
If you happen to find yourself in that camp, there may be resources available that can make your first purchase more accessible than you realize. Any savings you’ve been diligently setting aside each month can add up, no matter how small.
How much is enough, and what is the best strategy to bring you closer to your goals? In this post, we’ll talk about how you can use your RRSPs to get into the market in what may be the smartest way possible.
Wondering if that beautiful dream home is actually in the budget? Our Buyer’s Calculator can help you decide.
Using your RRSP for a Down Payment
Our team members are often asked “how much of my RRSPs can I use to buy a house?” The answer can get complex due to taxation. You don’t want to celebrate moving into your new home only to see an astronomical bill the following April.
However, as long as you stay on the right side of the rules for using your RRSP, you can confidently take the next steps toward homeownership. Let’s start with a breakdown of the two primary tools available for first-time home buyers.
Are you in the research stages of buying your first house? Start by reading the posts below:
- Buying Your First Home? Kingston Is Calling!
- The Hidden Costs of Buying a Home
- Buying a Home: Separating Myths from Facts
First Home Savings Account
This is a relatively new program in Canada. While the title may not seem glamorous, this is actually an exciting and highly tax-advantaged resource that all first-time home buyers should know about.
At its core, the First Home Savings Account (FHSA) is simple: it lets you save for your first house. However, there is a major difference between putting money in a regular savings account or RRSP and instead opening an FHSA.
All funds you contribute are tax exempt, up to $8,000 per year for 15 years to a $40,000 maximum. Maybe that doesn’t seem glamorous. Canada has several tax-sheltered investments that offer benefits for your contributions. It’s when you take money out that you can run into expensive trouble.
Here’s what is exciting about the FHSA: when you make a qualifying withdrawal to buy a house, those funds are also tax free. That means you don’t pay tax on those contributions, in or out. No other investment or savings account offers this advantage.
Although the FHSA has contribution limits, your investment income is not capped. That’s why you want to open your first account as soon as you can so you can benefit from the compound earnings, which are also tax-free as long as you leave them in the account.
Home Buyer’s Plan
Older home buyers who have been diligently saving all of their lives may not benefit as much from an FHSA as a younger person just beginning to save. However, there is still great news for anyone who with significant funds in an RRSP, whether it’s self-directed or set up by an employer.
The Home Buyer’s Plan allows you to use your RRSP for a down payment, which can open a myriad of possibilities. Under the current guidelines, you can withdraw $60,000 to put toward your home. If you’re buying with a partner who is also a first time buyer, you can double that allowance to $120,000.
This would more than cover the necessary down payment for many homes in Kingston, especially since real estate prices here are typically lower than in the GTA.
There is, however, one catch to be aware of with the Home Buyers Plan. Whatever you take out, you must repay within 15 years. Otherwise, the extra funds will be added to your taxable income for the year.
Are you looking for more reasons to start the search for your first house in Kingston? The posts below will give you food for thought:
- Is Kingston, Ontario a Good Place to Live?
- A Homeowner’s Ultimate Guide to Kingston Real Estate
- Where Is Kingston, Ontario?
Is Using Your RRSP to Buy a House Worth It?
Taking money out of an account dedicated to your retirement funds may seem counterintuitive. (Note: financial advice is beyond the scope of this blog, but an expert advisor can offer personalized guidance. Caldwell + Co. has brilliant mortgage professionals who we trust to take excellent care of our clients.)
Overall, however, it’s almost always worth it to buy your first house as soon as you can using whatever resources you have. Think of it this way:
Once you get your foot onto the property ladder, you’ll begin building equity.
- First, each mortgage payment will pay down your loan, bringing you one step closer to owning your house free and clear.
- Secondly, home values can fluctuate over the short term, but the longer you own it, the more it will appreciate in time.
Every time real estate prices rise, your purchasing power and net worth will increase. That’s one reason why pulling from an RRSP to get into the housing market could be well worth it depending on your goals and resources.
For most of our clients, the thrill of turning the keys to a new home is worth the time and sacrifice. For us, seeing the joy in a new homeowner’s eyes is why we do what we do here at Caldwell + Co.
One of our favourite memories is walking with a client to a showing and a previous client saw us while driving by. They rolled down their window and yelled “best Realtor ever!” Maybe it’s not an official endorsement from CREA, but it’s what we live for!
Are you ready to start the search for your first house? Our Kingston real estate agents are happy to help and guide you through each step. Reach out to us at caldwellco@royallepage.ca or call 613.449.6588 today.
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