First-time home buyers can use RRSP funds to top up their down payment
Now that the Bank of Canada has cut its benchmark interest rate to 0.5%, it looks like mortgage rates will also fall. But the government may try to head off a real estate market bubble by raising minimum down payments and shortening maximum mortgage amortization periods to 20 years, which would limit your financing flexibility. Is it time to use the Home Buyers’ Plan to dip into your RRSPs for down payment funds?
Under the federal government’s Home Buyers’ Plan (HBP), first-time home buyers may withdraw up to $25,000 from their RRSPs in a calendar year to buy or build a qualifying home. That amount will not be included in your income and tax will not be withheld on the withdrawal. So for a couple, each with at least $25,000 in their separate RRSPs, that could mean as much as an extra $50,000 to top up a down payment.
As you’d expect, there are many ifs, ands, and buts involved in the HBP, but you have to follow just a few key items in order to qualify for withdrawing funds from your RRSP:
- You must be a Canadian resident and have entered into a written agreement to buy or build a qualifying home – which includes just about any type of housing unit in Canada.
- The prospective home must be deemed your principal residence for tax purposes within a year of buying or building it. So you can’t use the HBP to, say, buy or build a recreational property by the lake.
- The prospective home must be your first. If you or your spouse or partner lived in a home you owned within the last four years before your HBP withdrawal, you won’t qualify for the program.
- You must repay the amounts you’ve withdrawn back into your RRSP over a maximum 15-year period, with a minimum annual repayment of 1/15 of the total withdrawal. You may, of course, pay back larger lump sums at a faster rate if you wish.
Is it worth it?
The downside of the HBP is that you’re taking money out of your RRSP, so you’ll lose the effect of tax-deferred compounded growth on any investments in the plan. However, this may be offset by the Principal Residence Exemption on any realized capital gain in the value of your property when you sell.
In addition, you’re still regularly paying back the HBP withdrawal into your RRSP over 15 years, so that money will still be growing and compounding along with your regular annual contributions. It just won’t be growing as fast. At the end of the day, your home will very likely have appreciated in value, but so will your RRSP.
Should you borrow from yourself?
You should consider carefully whether borrowing funds from your RRSP for a down payment makes sense in the context of your personal situation. There are many factors involved, including the size of your RRSP, the type of home you’re considering, your overall financial resources, your family plans, and your ability to repay.
To make an RRSP withdrawal under the HBP, file CRA Form T1036-14e. If you’re in the high net worth category and larger amounts are involved in your RRSP, getting some objective advice from a qualified financial planner is advisable.
© 2015 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.