How to Use Your RRSP to Maximize Your Down Payment

Saving a down payment for a house can be a daunting task. In this day and age, it can take years to save up enough money to afford a home, depending on various personal and economic factors. However, the Canadian government has created a Home Buyers’ Plan program, which allows first-time homebuyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to increase their down payment. If you’re buying with someone who also qualifies for the program, that gives you up to $70,000 to put toward your home purchase.

Essentially, by using your RRSP, you are borrowing funds from yourself to purchase your home. Below, we will explain both how much of a down payment you require and how you can leverage your RRSP to help pay for it.

How Large of a Down Payment Do You Require?

When purchasing a home and applying for a mortgage, you must have a down payment. A down payment is a lump sum of money the borrower (in this case, the homebuyer) gives the lender up front in cash to secure the mortgage loan for the property.

Many factors determine how much money you must put down when buying a home. For example, if you’re self-employed or have a poor credit history, the lender could ask for a larger down payment because you are viewed as a riskier borrower.

Typically, a down payment will come from the homebuyer’s savings, as it is better to use your equity for the down payment rather than taking on more debt (which may carry a high interest rate) to cover the down payment – which would be taking on debt to pay for more debt.

The money you put down on your home will be dedicated to the home’s purchase price, and the mortgage will cover the rest of the cost, which you will pay back over a specified period, at a specified interest rate.

The minimum down payment required is dependent on the price of the home you are buying. However, it is usually ideal to put down at least 20 per cent of the purchase price. Should you contribute less than 20 per cent of the home’s price, you will be required to purchase mortgage loan insurance, which protects the lender if you default on your mortgage.

With down payments being percentage-based, the higher the home price, the more money you will be required to put down. Therefore, as the real estate market continues to simmer and prices rise, buyers will be required to put down a more money. This is where the Home Buyers’ Plan can help first-time buyers.

What is the Home Buyers’ Plan?

The Home Buyers’ Plan (HPB) is a federal government program that gives first-time homebuyers an opportunity to withdraw funds from their RRSP, under the agreement that they will pay back the funds over a period of 15 years.

The HBP allows first-time homebuyers to withdraw funds from multiple RRSPs as long as your name is listed as the owner on the account. To qualify for the HPB, you must meet specific criteria:

• Be a first-time homebuyer
• Have a written agreement to purchase or build a qualifying home
• Be a resident of Canada when your RRSP funds are withdrawn and until the house has been purchased or constructed
• Must intend to live in the home as a principal residence within one year of the purchase or building completion

Upon withdrawing the funds from your RRSP, you will need to repay them eventually. The repayment period begins in the second year after the withdrawal of the funds, and you have up to 15 years to pay back the original amount. Each year, you will need to repay a specified minimum amount during that period. You can also choose to repay a higher amount, if you want to.

Before you withdraw the funds from your RRSP, make sure you budget to pay the funds back. If you do not put the funds back directly into your RRSP, your taxable income for that year will be increased by a corresponding amount.

Remember to consult with a trusted financial expert before making any decisions regarding funding your down payment, to ensure you make the decision that best suits your financial situation.

Sources:

• Hard Bacon
• Government of Canada
  https://www.canada.ca/en/financial-consumer-agency/services/mortgages/down-payment.html#toc0
  https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan/participate-home-buyers-plan.html