Crunching your cash: savings options for homebuying

If you’re wondering about your savings options for homebuying, use no-risk options such as a high-interest savings account or GICs.

There are three different types of accounts to choose from and each has its own advantages and disadvantages. Here are your savings options for homebuying.:

RRSP

An RRSP allows the money you save to grow tax-free. If you qualify as a first-time homebuyer, you’ll also be able to take advantage of the Home Buyers’ Plan (HBP).

Using the HBP, you can withdraw up to $25,000 from your RRSP as long as the money was deposited more than 90 days ago. If you’re buying with a spouse or partner who’s also a first-time buyer, you can each take out $25,000 for a total of $50,000. The money you withdraw has to be taken out no later than 30 days after the closing date.

You must repay what you borrowed the second year after the year you withdrew the funds. You have up to 15 years to repay that amount.

For example, if you borrow $24,000 from your RRSP, you’ll need to pay $1,600 a year ($24,000 ÷ 15 = $1,600).

Year

2016

2017

2018

HBP balance

$24,000

$22,400

$13,000

Annual repayment

$1,600

($24,000 ÷ 15 years)

$1,600

($22,400 ÷ 14 years)

$1,000

($13,000 ÷ 13 years)

Your payment

$1,600

$9,400

$1,000

You can pay more than the $1,600 towards your HBP in any given year and your annual payments will decrease. If you decide to pay $9,400 in the second year, then you’ll only need to pay $1,000 a year thereafter.

The great thing about the money you withdraw from your RRSP for the HBP is it’s tax-free. However, if you can’t afford to make the annual payment, you’ll have to declare it as RRSP income on your tax return.

 

TFSA

Like an RRSP, a TFSA also allows your money to grow tax-free. But there aren’t as many restrictions as there are with an RRSP.

If you’re buying a home for the second or third time, you can still make a tax-free withdrawal from your TFSA. There aren’t any first-time homebuyer restrictions.

You’re not restricted from borrowing just $25,000 because you can withdraw as much as you want from a TFSA. You also don’t have to pay the money back over a specific timeframe. In fact, you don’t have to repay the amount you took out and there aren’t any tax penalties.

The other good thing about using your TFSA is you keep your RRSP intact and allow your money to compound over time so you can save more for retirement.

However, you won’t get a tax refund if you save using a TFSA instead of an RRSP. If you were to get a refund, you could use that extra cash for your down payment and be able to save even more money.

 

Non-registered account

You could use a non-registered account to save for a house but this isn’t the best option because you’ll be taxed on any interest earned.

The only reason you might use this type of account is if you don’t have any RRSP or TFSA contribution room, which is highly unlikely.

However, you can withdraw as much money as you want from a non-registered account and you never have to pay it back.

 

Which one to choose?

RRSPs and TFSAs allow your money to grow tax-free while a non-registered account does not. A TFSA has fewer restrictions while a saving in an RRSP will provide you with tax refunds, which can increase your savings.

The best option might be to use a combination of both!

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