Buying their first house is a roller coaster ride of emotions for most people. Young or older, single or coupled, conservative or high-risk speculator – the first time buyer will experience highs and lows throughout the process. Any time large sums of cash are involved in a decision, the experience intensifies.
One of the first decisions that must be made is where the initial outlay of cash (aka downpayment) will come from.
Using Retirement Savings
The Canadian Government has developed a Home Buyers’ Plan to provide an option for those who have savings in RRSP accounts. Individuals can withdraw up to $25 000 in a calendar year (couples may use $50 000) to put toward a downpayment. In order to qualify for this program, they must meet the following criteria, according to the Canada Revenue Agency website:
They must be considered a first-time home buyer.
They must have a written agreement to buy or build a qualifying home for themselves.
They must have a written agreement to buy or build a qualifying home for a related person with a disability, or to help a related person with a disability buy or build a qualifying home (obtaining a pre-approved mortgage does not satisfy this condition).
As long as the funds have been on deposit for at least 90 days, and the buyer qualifications are met, the withdrawal is not taxable. It must be repaid within 15 years, with 1/15 of the total amount payable annually. To ensure that they get the full value of both the RRSP tax shelter and the equity being built in their real estate, buyers will want to budget carefully and maybe even consider an automated weekly or monthly payment back into their RRSP. Most banks will gladly arrange to have these regular contributions come out of a client’s account as a pre-authorized debit.
*Important Note: In order to have RRSP contributions acknowledged as repayments, they must be specifically designated as such. Unless CRA is notified that funds are to be used toward repayment of the loan, they will be considered regular contributions, and there will be negative tax implications resulting from defaulting under the terms of the Home Buyers’ Plan.
- Using your RRSP’s as a downpayment may be right for you if it helps you to avoid the extra cost of CMHC premiums on a high-ratio mortgage.
- Complete repayment can be made without penalty at any time.
Another tip from the RBC website is this:
- If you have already saved $25,000 for a down payment and assuming you still had enough “contribution room” in your RRSP for a contribution of that amount, you could move your savings into an RRSP at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers’ Plan. The advantage? Your $25,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home. But remember, you will have to pay that amount back to your RRSP over the next 15 years. (read full article here)
- Discipline and careful planning is required to ensure timely repayment of both the mortgage and the RRSP funds.
- Since RRSP’s are tax sheltered, the money may be better left to grow in an account than used to pay down a low-interest mortgage.
- Withdrawing retirement savings to buy a house exposes the equity to the fluctuations of the real estate market. Depending on market trends and the rate of return that the investments are currently getting, growth may be slower than it would have been.
There are varying opinions about whether using this program is a good idea or not. Ultimately, each buyer must know their own budget, spending habits, and future income prospects. For perspective, the total payable per year on a $25 000 loan would be $1666.67, or $138.89 per month. If adding that amount to the monthly expenses would impose too large a burden on the bank account, it might be a good idea to save a little longer, or to use a different vehicle, such as a TFSA, to fund a downpayment on a house.