The loan limit is $20,000 per participant to be repaid in equal installments over a maximum of 15 years with zero percent interest. The first repayment is scheduled for March 1st in the second year after entering the plan. Tax deductions will be denied for contributions to an RRSP that is withdrawn within 90 days under the Home Buyers Plan (HBP). People may borrow money to start a retirement savings plan, then, 90 days later, withdraw the money, repay the loan and use the resulting tax refund as a downpayment on a home. In 1996: unsecured $20,000 loans were discontinued. Where a tax refund is to be used as minimum equity for an NHA insured loan, proven assets equal to the minimum equity need to be available. The full amount of the loan for the RRSP doesn't necessarily need to be supported by proven assets. For example, if a loan of $20,000 for an RRSP contribution leads to a $7,000 tax refund, and $5,000 is the minumum equity required, then only $5,000 in proven assets need be available in proven assets.
If the individual decides not to repay the scheduled amount or decides to repay only a part of it, the amount that is not repaid will be treated as a permanent withdrawal from the RRSP and included in the individual's income for that year. To participate in the plan, a Home Buyers' Plan-Withdrawal Application (Form T1036) which is available from the Revenue Canada District Office, should be completed.
Definition of a first time home buyer:
If you enter the Home Buyers Plan in 1998:.
If neither you nor your spouse owned a home and lived in it as your principal residence anytime between January 1, 1994 and 31 days prior to your RRSP withdrawal, you are considered a first time home buyer.
Definition of a spouse:
An individual whose relationship with another individual is recognized as a marriage for other income tax purposes will be treated as a spouse.
Please refer specific HBP questions to a Revenue Canada TIPS (Tax Information Phone System)Taxation office.
Example: First time buyer with $5,000 in unused RRSP contributions. Gross salary: $40,000. The first time buyer has $5,000 in a term deposit.
The $5,000 is deposited in an RRSP & next year a home is purchased. The $5,000 is withdrawn from the RRSP under the Home Buyer's Program & used on closing. A $100,000 mortgage is given at 7%. The marginal tax rate between $30,000 & $50,000 is 40%. The $5,000 RRSP loan has to be paid over 15 years, $33.34 annually. Placing the $5,000 into the RRSP for 90 days generates a $5,000 tax deduction against income and a ~$2000 tax refund results. Prepaying it on the first anniversary of the mortgage slashes the interest payable by $8,033. Interest on home mortgages is not tax deductible so the real saving is the income that must be earned to pay $8,033 interest, i.e., $13,388. By placing $5,000 downpayment in the RRSP for a minimum of 90 days, $8,033 was saved without touching any existing money in RRSPs.
Example: First time home buyers buying a home for $200,000. With $25,000 downpayment, they are borrowing $175,000, a loan-to-value ratio of 87.5%. The mortgage insurance premium (normally added to the mortgage) is 2.5% for the amount borrowed or $4,375 (plus 8% PST, to be ignored in this illustration). The mortgage will total $179,375. At 6.75%, amortized over 25 years, they will pay $1,228.81 per month. For loan-to-vlaue ratios between 75% & 80% , the insurance premium is 1.25% of the amount borrowed. From 80.1% to 85% it is 2 % rising to 2.5% for ratios between 85.1% and 95%. These first time home buyers were just above the 85% threshold. To drop to85% and pay 2% insurance, not 2.5%, their mortgage must shrink by $5,000. If they have RRSPs they could each borrow $2,500, increasing their downpayment to $30,000 and reducing their mortgage to $170,000 plus $3,400 insurance premium for a total of $173,400. Their monthly payment would be $1,187.88, less by $40.93 per month. Their mortgage insurance would be $1,100 less and the interest on it, $1,158. All this results from borrowing $5000 from their RRSPs. If they pay the $40.93 saving into their RRSPs eash month the loan would be paid off in just over 10 years. There is no mortgage insurance when the loan-to-value ratio is 75% or less. If they each borrow $12,500 from their RRSPs and added that to their downpayment of $25,000 then the monthly mortgage payments would be $1,027.57. That would eliminate both the insurance premium($4,500 ) plus the interest payable ($4,746), a total saving of $9,246. By using the $201.24 monthly saving to pay off their RRSP loan, the loans would be cancelled in 10.35 years.
Source: Alan Silverstein "The Dotted Line, New in Homes, The Toronto Star. October 11, 1997 and February 20, 1998.
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