Unlocking the Power of Your RRSPDecember 16, 2012
Saving for retirement is important – but so is buying a comfortable home that you can live in for many years to come. Fortunately, the two do not have to be mutually exclusive, thanks to the RRSP Home Buyer’s Plan. By borrowing your retirement savings for a down payment you can reduce your cost of home ownership and repay the borrowed funds without penalty.
How Does it Work?
The Home Buyer’s Plan allows you to withdraw a maximum of $25,000 (per person) in order to purchase your first home (or a home if you haven’t owned within the past four years). You have 15 years to repay the borrowed funds; you are required to make a regular payment each and every year, beginning the second year after purchase until the funds are fully repaid.
Who is Eligible?
As mentioned, you cannot borrow from your RRSP to purchase a home if you have owned a home within the previous four years. The funds you are borrowing must already have been invested in your RRSP for a minimum of 90 days and you must intend to live in the home within one year of purchase. Additionally, if you have previously used the Home Buyer’s Plan to purchase a home it must be fully repaid before borrowing again.
Note: If your spouse has owned a home within the past four years but you have not, you are still eligible for the Home Buyer’s Plan.
Advantages of the Home Buyer’s Plan
By borrowing against your RRSP for use as a down payment, you can reduce the cost of your mortgage and lower your monthly payment. Additionally, if you are unable to put down at least a 20% down payment through traditional means, using the Home Buyer’s Plan can make up the difference and save you thousands in mandatory insurance premiums for high-ratio mortgages.
Even if you have $25,000 kicking around for a down payment, as long as you have 90 days before you need to borrow the funds you can contribute the cash towards your RRSP and borrow it later, while still gaining the advantage of a tax deduction for that year.
What to Consider
Keep in mind that while you borrow the funds they will not be growing in your investment portfolio – so you must be comfortable with the fact that you may potentially be losing investment growth. Additionally, if you cannot repay the minimum 1/15th payment each year, you’ll need to account for that amount being added to your annual income and taxed accordingly.
The Home Buyer’s Plan is an excellent tool for home buyer’s looking for a larger down payment on their home. For additional information on the Home Buyer’s Plan, visit the Canada Revenue Agency website.