RRSP Down Payments: Everything You Need to Know About The Home Buyers’ Plan
The Home Buyers’ Plan was created by the government to help Canadians get over the big hurdle of saving up a down payment for their home. It allows qualified individuals to borrow up to $35,000 from their registered retirement savings plans (RRSPs) to use toward the down payment. The money needs to be repaid within 15 years to avoid having it count as taxable income.
While there are certainly advantages to using this program for your down payment, it may not be the right move for everyone. Learn more about the details so you can make an informed decision.
Who Should Borrow
The Home Buyers’ Plan is especially helpful for first-time homebuyers who are having a hard time saving up tens of thousands of dollars for a down payment. Paying rent can feel like you’re just throwing money away because you’re not building up any equity. But high rent payments make it hard to save up the money you need. Borrowing from your RRSP makes sense.
Even those who have a sizable amount of money saved up already may want to consider taking advantage of the program. You could use the money you borrow to give your savings a boost to reach a 20 percent down payment. This will allow you to avoid mortgage insurance, which adds to the cost of your monthly mortgage payment.
Qualifying for the Home Buyers’ Plan
To qualify for the Home Buyers’ Plan, you have to be a resident of Canada and a “first-time homebuyer”, but that’s a bit misleading. Actually, you can count as a first-time homebuyer even if you’ve owned your home in the past, as long as you haven’t owned a home in the past four years. You also need to have a purchase agreement for the home that you want to buy, and you have to be planning to make that home your sole residence.
As long as you meet these rules, you should be able to borrow from your RRSP.
Taking Money Out
Getting the money is fairly easy. You simply need to fill out Form T1036. This is a standard application form that first requires you to answer questions to determine eligibility. After you’ve filled out the form, you give it to the lender you’re going to use for your mortgage. They will take care of the rest.
It’s important to note that you can only withdraw funds that have been in your RRSP for at least 90 days. Recent deposits are not eligible.
The Repayment Plan
Repaying the money you borrow through the Home Buyers’ Plan can be a little confusing. The smartest way to make payments is probably to make regular monthly payments, but you don’t have to do it that way. The only requirement is that you pay an annual amount that’s equal to the amount of money you owe divided by the number of years that you have left to repay the loan.
For instance, let’s say that you borrow $30,000. You’d then be expected to pay $2,000 each year. However, if you pay $5,000 the first year, the required annual amount is going to change. The next year, you’d only be required to pay $1,785.71 ($25,000 divided by the 14 years remaining on the loan).
You are always able to pay more than the required amount, and it’s smart to do so if you have extra money.
Other Things to Consider
Borrowing your down payment through the Home Buyers’ Plan is a good move if you need that money to get into a home. But there are a few things to consider before making your choice.
First, any amount that you have to pay toward that loan will count against you when the bank determines how much money they will lend. With a full down payment, for instance, they might be willing to give you a mortgage that has a $2,500 monthly payment. When you borrow the down payment, though, the bank will consider your repayment amount as debt. If you’re paying $200 a month toward repaying the RRSP loan – even if you’re really paying a lump sum of $2,400 a year – the bank would give you a mortgage with a $2,300 maximum monthly payment.
Additionally, you have to remember that when the money that’s not in your RRSP is not growing at the expected rate. This can negatively impact your retirement savings, especially if you take the full 15 years to repay the money that you borrow.
If you’ve been struggling to come up with a down payment for your first home, it’s comforting to know that you have options. Talk to a mortgage professional to determine whether borrowing from your RRSP is the right move for you.