Pay down your mortgage or invest in your RRSP?

In response to my RRSP week, there have been quite a few questions regarding the effective use of the homebuyers plan; again I approached Aaron Theilade from Investors Group for some guidance.

 

Does it make more sense to pay off your mortgage or to invest in a Registered Retirement Savings Plan? Perhaps you’re expecting to receive some extra money from an inheritance or an employment bonus, and you’re not sure which route to take. The truth is, there is no easy answer. There are many variables that must be taken into account. Concentrating on paying down a mortgage may be the best route for one person, while focusing on an RRSP may benefit another. Here are some factors to consider:

♦ Your age. When you’re young, it is wise to make your RRSP a priority. The sooner you get money into a sheltered retirement plan, the longer it will grow on a tax deferred basis. But don’t overlook the need to build home equity. It can give you a head start on the expenses of moving to a larger home as your family grows.

 

♦ Your income. The more you earn, the higher the rate of tax you’ll pay. That means you must earn more in before-tax dollars to make mortgage payments. If you’re a high income earner you may want to quickly reduce this expensive debt.

 

♦ Investment returns. Pay attention to the general rate of investment returns you could reasonably expect to earn when you make your decision. Astute investors could be further ahead by investing their money than paying down the mortgage. The benefits of investing are magnified by an RRSP, with tax-deferred growth within the plan and the tax deductions on contributions.

 

♦ Your mortgage rate. If your current mortgage rate is low, it may make more sense to invest in an RRSP. In times of good returns for financial markets, low borrowing costs make a compelling case for contributing to your RRSP.

Home Buyers’ Plan (HBP) RRSP Withdraw for First Time Home Buyers

Lately I have come across a higher number of clients who are interested in the RRSP early withdraw plan for first time home buyers. This week I will focus on Home Buyers Plan, and some tips that clients have found useful.

The Home Buying Plan is a great way to help you acquire the necessary down payment to afford a home, the benefit is that you are really borrowing from yourself  interest free!  The loan from your RRSP’s must be repaid within 15 years and can be set at varying lengths of amortization depending on the institution who is providing the loan. Do not attempt to pay the loan off in 1-2 years,  we have all been taught to be adverse with debt but opting to pay off the loan in 1-2 years can lead to serious cash flow problems, and financial upset.

Because the loans are on the total principle withdraw from the RRSP they can easily add up. Understand that you are not paying any interest on this loan but if you take a $15,000 RRSP loan out and take a two year repayment the monthly payment will be $625 high enough to seriously disrupt your cash flow, but if you take a 5 year repayment it becomes a more manageable $250 per month

Today’s topic is the conditions for the HBP, one of the most important things to ensure is that you must be a first-time home buyer. Several files that have crossed my desk recently I have had a number of folks who whish to use the program but have obviously purchased quite a number of homes before, this will not fly with CRA.

Below are the conditions that the CRA presents for participation

Conditions for participating in the HBP

Only the individual who is entitled to receive payments from the RRSP (the annuitant) can withdraw funds from an RRSP. You can make withdrawals from more than one RRSP as long as you are the annuitant (plan owner) of each RRSP. Your RRSP issuer will not withhold tax on these amounts.

Generally, you will not be allowed to withdraw funds from a locked-in RRSP.

To participate in the HBP, ONE of the following conditions must apply:

* You are withdrawing funds to buy or build a home for yourself as a first-time home buyer.

or

•    You are withdrawing funds to buy or build a home for a related person with a disability .
•
In addition, ALL of the following conditions must apply:

* You must enter into a written agreement (Offer of purchase) to buy or build a qualifying home. The agreement may be with a builder or contractor, or with a realtor or private seller. Obtaining a pre-approved mortgage does not satisfy this condition.
* You intend to occupy the qualifying home as your principal place of residence.
* Your repayable HBP balance on January 1 of the year of the withdrawal is zero.
* Neither you nor your spouse or common-law partner owns the qualifying home more than 30 days before the withdrawal.
* You are a resident of Canada.
* You buy or build the qualifying home before October 1 of the year after the year of withdrawal.

You are responsible for making sure that all HBP conditions that apply to your situation are met.

If a condition is not met while you are participating in the plan, your RRSP withdrawal will not be considered eligible. You will have to include the RRSP withdrawal as income on your income tax return for the year you received the funds.

If you do not meet the conditions to participate in the HBP in the current year, you may be able to participate at a later date.