Letting Your Savings Work for You

Let’s face it. You’ve worked hard and saved when and where you could. To most Canadians, this is a part of everyday life. Well now finally, let some of the money you have worked for do some work for you.

In 1992, the Canadian Customs and Revenue Agency (CCRA) introduced the Home Buyers’ Plan (HBP). The HBP plan allows for Canadian consumers to withdraw up to $25,000 from their RRSP, to use in assistance of purchasing their first home. In the case of a couple if they are both eligible, the number is doubled up to a total of $50,000.

Most people use this RRSP withdrawal to add to any down payment they have already amassed to put down against the purchase price of their home, to either lower the amount of mortgage they will require, or increase the amount of the mortgage they can carry.

Sound too good to be true? Not exactly. Any amount that you may have deducted must be repaid back into your RRSP account in annual payments. You have 15 years to repay this amount, or if you don’t it will be added to your taxable income for the year and you will be taxed accordingly.

By using these funds, if you have them invested in RRSPs, you get the money working for you in a tax free and efficient way. What happens if you don’t have any RRSPs? The following strategy may be right for you. If you have the room under your RRSP cap, you can borrow funds from your bank and purchase RRSPs to later contribute to your down payment. Not only are you helping yourself today, but building a nest egg for your future.

To find out if you have room under your RRSP cap to contribute look in your Notice Of Assessment (NOA). The government will give you a figure, which is usually a percentage of your reported income annually.  If you haven’t used the RRSP for that year, either partially or in full, the balance gets carried forward and added to the next year’s total. If you don’t keep your NOA’s, you can get your latest one by calling the CCRA at 1-800-959-8281.

A couple of words of caution: plan early. If you think that this may make sense for you and your financial position, take the steps you need to commence and start today. In an interest rate environment such as the one we face today, where rates are on the rise, make your decisions early. It could save you hundreds if not thousands of dollars.

Keep in mind, an RRSP is an investment into your future, so in case you can’t afford to pay your mortgage or have no income for a while and are forced to sell your home, you may lose your down payment, along with it your future savings.

For more information contact a mortgage professional who can give you guidance, and help you decide what’s right for your situation.

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