Should I use my RRSPs to buy a home if I have little or no downpayment?
This type of question goes through the minds of many Canadians who are buying a home. The Home Buyer’s Plan allows qualified home buyers to use up to $25,000 in each of their RRSP's to purchase a home without having to pay income tax. In order to qualify for the Home Buyers’ Plan neither you nor your spouse/partner may have owned a home and lived in it as a principal residence.
An overview of the Home Buyers’ Plan
You and your spouse/partner can borrow up to $25,000 each from your RRSPS to purchase a home, as long as the funds are accessible. For example, if you have a "locked-in" RRSP, or if your funds are in a Guaranteed Investment Certificate that does not mature for three years, you may not be able to access your funds. Furthermore, RRSP contributions must remain in the RSP for at least 90 days.
If you are withdrawing funds from your RRSP to purchase a home, you must be registered as one of the owners of the property. Once the funds are withdrawn you must complete your purchase of the home by October 1st of the year following the withdrawal. The home must also be used as your principal residence within one year after buying or building it.
RSP Home Buyers Plan
So if you have decided to purchase a home and you haven't quite saved the required 5% down payment or you would like to increase your down payment, or maybe you need to buy furniture and appliances, but you don’t have the cash, then why not use the RSP Home Buyers Plan (H.B.P.)!
But I don’t have $25,000 in my RSP!
Take out a Home Buyers Plan Loan! (H.B.P.)
Here's how it works
Through The RSP Home Buyers Program, you are able to generate a down- payment from your unused RSP contribution room. Each year when an individual earns income, they are eligible to contribute 18% of their income to a maximum of $22,000 to their RSP. Many individuals never take full advantage of this limit and as a result, the amount is carried forward to the next year and added to the amount they are eligible to contribute in that year. As a result a "carry-forward" is created and in many cases, continues to grow year after year. By re-capturing some of your unused RSP contribution room you can in most cases generate a large enough tax refund to cover your 5% down-payment for a home.
Your financial institution will lend you up to $22,000, if you have the contribution room, for 90 days and deposit the $22,000 into an RSP (it must remain in the RSP for at least 90 days!). Under the new rules of the H.B.P., you can borrow your unused RSP contribution limits since 1991 to obtain an income tax refund for use as a down payment on a home. After the 90 days, the bank is repaid by collapsing your RSP (so your cost is basically 3 months interest).
What good is that? I won’t have a loan, an RSP or money for a down payment?
True, but you will have an Income Tax Receipt for $22,000 to deduct from your taxable income when you file your tax return that year and depending on your marginal tax rate, this should generate an income tax refund anywhere from $5,000 to $8,000 to purchase a home!!
That sounds too good to be true! What’s the catch?
The Government requires you to put this $25,000 back into your RSP but they give you 15 years to do it! If your minimum repayment is not made, then the payment is taxed as income for the year it is due. The repayment of 1/15th of the amount withdrawn must be made by the RRSP contribution deadline of a given year. You must contribute the minimum repayment back to your RRSP each year, but you can also repay the entire amount at any given time. However, the repayments are not tax deductible like the original RRSP contributions; and they do not use up the RRSP contribution room.
Deciding whether to use the Home Buyers’ Plan becomes a lifestyle choice. If you are certain that it is the right time to purchase a home, and you have no other alternative to borrow funds for your purchase, then it’s perfect.
The good new is, at the end of 15 years, you will have increased your Net Worth and you have a home possibly for less money and at less cost than you would have had by waiting!! This is a great window of opportunity open from now until the RSP deadline for contributions in March!