I am always puzzled as a mortgage broker and a provider of financial advice how many first time home buyers fail to take advantage of all the 'free money' that is available to them.
The RSP Homebuyers' plan allows borrowers to withdraw up to $25,000 (without tax penalty) to be used towards the purchase of their first home. No repayments of any kind have to be made for 2 years, after which borrowers must repay at least 1/15 of the amount back to their own RSP annually. If you decide not to repay the money in a given year, that amount is included in your income (which you then have to pay tax on).
A few key things most people miss however:
1. Funds withdrawn from the RSP do not have to be used towards the down payment or closing costs. As long as you are buying or building a qualifying home, you can technically use the money for anything you want. If you are carrying higher interest debt such as credit card debt, this could be a golden opportunity to wipe out those debts. With your improved cash flow, start a monthly contribution plan to your RSP.
2. Even if you don't have an RSP, if you are definitely planning on buying in 4-5 months, February is the perfect time to get free money. Let's work through a quick example. Say you have $15,000 saved to put towards the down payment/closing costs on your home and you currently earn $50,000 per year. Contribute that money to your RSP this month (RSP contribution deadline is March 2nd) to have the contribution act as a credit for your 2014 income taxes. As a resident of Ontario, this will help generate an extra refund of approximately $4,600. Make sure you file your taxes electronically as soon as possible. If you file in mid-February, you should have your refund by the first week of March.
The only caveat is the money has to be in the RSP for 90 days in order to qualify under the home buyers' plan. So if you were to make the contribution today, you wouldn't be able to withdraw the money without tax penalty until the 1st of May.
If you don't have the money, borrow it. After the 90 days, simply withdraw the money and use it to pay off the loan. Although you might end up paying a few hundred in interest, this would still give you access to the tax refund.
Using the $4,600 generously given to you by the government, you could either make a larger down payment (which might help reduce your CMHC fees), pay down some debt, or simply have cash to help with moving expenses, new appliances, etc.
If you aren't getting this type of advice from your bank or current mortgage specialist, I would appreciate the opportunity to earn your mortgage business.
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