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First Time Buyers: Raise Money for your Down Payment with RRSPs

The March 1st, 2007 RRSP deadline is rapidly approaching, so first time buyers don’t miss your chance to “create” a down payment with your RRSPs using the Home Buyer Plan (HBP). Read on to learn about the HBP and how you can use it ‘create’ a down payment to buy your dream home!

First time home buyers can take advantage of special government established programs to help make the dream of home ownership a reality. One such program is the RRSP Home Buyer’s Plan which allows first time home buyers to withdraw up to $20,000 from their RRSPs tax free to use towards the down payment in the purchase of a home.

To qualify as a first time home buyer, the purchaser must not have lived in a home owned by himself or his spouse in the last five years. If both you and your spouse qualify under HPB, you can each withdraw up to $20,000 from your RRSPs for a total of $40,000. However, before you are entitled to withdraw the money from your RRSP, you must have entered into a written agreement to purchase or build a home that you intend to occupy as your principal residence. Thus, the purchase of a cottage, for example, would not qualify for this program as it is not a principal residence.

Money can be withdrawn from your RRSP provided it has been in the account for at least 90 days. If you have signed an Agreement of Purchase and Sale and you have at least 90 days until your closing, a good strategy would be to (open an account if you don’t have one) make a contribution to your RRSP in order to receive the tax deferred benefit during income tax time and then when the 90 days are up, withdraw the same money and put it towards the purchase of your home using the HBP.

Money withdrawn under this Federal program must be paid back to your RRSP within 15 years. People usually deposit one fifteenth of the amount withdrawn back to the RRSP over each of the following 15 years. If you do not pay the full amount back to your RRSP within the 15 year time limit, the amount outstanding will be subject to income tax when you file your income tax return in the following year.

What if you don’t have any money in your RRSP?

Not to worry, you can still take advantage of HBP by simply creating a downpayment! If you are earning income or have earned income in the past few years, you are still entitled to contribute to an RRSP as you can contribute to an RRSP retroactive. Therefore, it would be wise to check your previous year’s Notice of Assessment (or call Revenue Canada if you have lost it) in order to find out what your RRSP contribution limit is. A tax refund is an acceptable down payment if it is in hand at the time of closing.

Now here’s the fun part. If you could use some help with raising money for that downpayment to your dream home, then you can “create” one with RRSPs and HBP. Simply max out all your unused RRSP contribution from previous years – if you don’t have the funds, you can even take out a short-term RRSP loan to cover the amount. After 90 days, simply repay your loan by cashing in your RRSPs and then sit back and wait for your income tax refund to come in the mail which you can use towards the down payment of your new home purchase.

What are you waiting for? Don’t miss the March 1, 2007 RRSP deadline and start contributing to buy your dream home today! If you have further questions or want more information, please email Joanna@thinktorontohomes.com or call 416.495.2340.

Posted on Wednesday, January 31, 2007 at 07:51PM by Registered CommenterElaine | Comments1 Comment

Reader Comments (1)

Joanna,

Thanks for the information, especially with combining a RRSP loan with the HBP! I just have a question on how I should time all this with my mortgage. Should I contact the banks to be pre-approved for a mortgage, then take out my RRSP loan, get my tax refund, and pay off the RRSP loan 90 days later? Or should I deal with the RRSP/HBP loan/refund/repayment first, then start to talk to a mortgage broker? Or some other scenario?

I have good credit and, by planning out several budget scenarios and using several online mortgage calculators, I have an idea of what kind of mortgage I can afford and what the banks would be willing to loan me. I'm just concerned about intertwining the RRSP loan and the mortgage approval process; I'm looking to take a $15,000 RRSP loan and, even if I reduce my payments by getting a 10-year loan this will still increase my monthly debt load by $150, which could negatively affect my mortgage negotiations. If I could have the RRSP loan paid off and the refund in my hand *before* I begin mortgage discussions, all the better.

Thanks!

- Matt
January 7, 2009 | Unregistered CommenterMatt K

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