Using an RRSP for down payment can solve the biggest obstacle standing in the way of purchasing real estate for many Canadians. Finding enough money for the down payment on a house is an even bigger problem for people who live in larger cities like Toronto or Vancouver where real estate prices escalate at a much higher rate.
Those would be buyers who are not fortunate enough to have someone help them out by gifting them part or all of the down payment may have another source available that they may not have thought of – their RRSP fund.
Using An RRSP For Down Payment
Canada’s Home Buyer’s Plan allows a first-time purchaser to withdraw up to $25,000 each from their RRSPs, with the condition that the money is repaid within 15 years.
This is a great opportunity to maximize your RRSP contributions:
- You don’t have to de-register the amount withdrawn
- you don’t have to pay income tax on the funds
If the full $25,000 is withdrawn, the minimum annual repayment would be $1,666. It’s basically an interest-free loan you make to yourself.
If you happen to be unable to make the $1,666 payment in any given year, you have to include that amount as income in that year. It’s not a penalty; it’s really just making you pay the income tax on that amount of money because it is no longer tax sheltered as part of the RRSP.
Higher Down Payment Requirements
Recently government regulations increased the minimum down payment from 10% to 20% to qualify for a conventional mortgage. Conventional mortgages do not require mortgage default insurance. The insurance premium can run as high as 3.15% of the value of your loan if you only have 5% down.
To qualify for the Home Buyers’ Plan the following conditions must apply:
- You may withdraw up to $25,000 from your RRSP. If you are married or purchasing the property with another first-time home buyer, each individual may withdraw up to $25,000 from an RRSP for a total of $50,000.
- You can make withdrawals from more than one RRSP as long as you are the owner. The combined withdrawal amount cannot exceed the $25,000 maximum per individual.
- Generally, you cannot use funds from a locked-in RRSP.
- The funds must have been in the RRSP for at least 90 days prior to withdrawal.
- A signed agreement proving your intent to purchase is required. This means you must provide a purchase contract from a builder or seller showing you as the buyer.
- You must buy or build before October 1 of the following year after your withdrawal. For example, if you withdraw funds from your RRSP in June 2015, you must buy or build before October 1, 2016.
- You must occupy the property being purchased unless you are purchasing the property for someone who is related to you and who is disabled, and the new home is proven to be better suited to their needs than their current residence.
- If you are disabled, you can use the funds to buy or build a more accessible home than the one in which you currently reside.
- The Home Buyers’ Plan cannot be used to purchase investment or rental property.
- You must begin to repay your RRSP two years after the funds are withdrawn. You have 15 years to repay the funds with at least 1/15 of the funds being repaid each year. If you fail to repay the minimum of 1/15 per year, that amount will be considered taxable income.
- You can participate in the Home Buyer’s Plan more than once, but only if your balance from the first withdrawal is fully repaid by the time you want to re-apply.
- Your RRSP can be established with borrowed funds. This technique could result in a significant tax refund, which in turn could be used as the down payment.
Some people are afraid to touch their RRSP funds while others would see this as a unique opportunity to maximize the return on their savings by acquiring a new asset and starting to build more wealth. Only you know which group you belong to.