Is It A Good Idea To Use Your RRSP For A Downpayment On A House?
One of the biggest hurdles you have to overcome when planning to buy a home is coming up with the downpayment. With average house prices starting at $520,000, you will be looking at at least a 20% downpayment. The Home Buyer’s Plan (HBP) is a federal plan that was created to help first-time home-buyers get into the real estate market. Those who qualify are able to withdraw up to $25,000 from the RRSP accounts tax-free for the downpayment. For couples buying together, they can pool together their withdrawals and put forth $50,000 towards their new home. However, accessing retirement funds is no easy feat and comes with regulations, which means that not every buyer qualifies.
If you are considering using the HBP, here are some things that you should know:
- While the HBP is marketed toward first-time criteria, the true rule is that the applicant cannot have owned a property within the past four years or, if purchasing with a partner, cannot have lived in a home that their partner had owned.
- The applicant must be planning to live in the home for at least a year of purchasing or building.
- Funds must be in an RRSP account for at least 90 days before the applicant can withdraw them tax-free.
- The withdrawal of the funds must be within 30 days of getting ownership of the home.
Prioritize Your Current Finances
For people first starting their careers, their primary focus should be their short-term and mid-term financial goals. Those in their 20’s who have a tax rebate (ie. tuition) should start saving via their TFSA to protect their investment earnings from being taxed. After building contribution rooms, withdraw those funds and put them in an RRSP, taking advantage of the additional funds from the tax rebate.
Paying Back Your RRSPs
It is important to know that while taking out your RRSPs is a great way to come up with a downpayment, that any funds that you take out have to be paid back within 15 years, or they will be taxed as a personal income. Unlike mortgages, they can be repaid as a lump-sum without penalty, over the given 15-year timeframe.
The Downside of Using Your RRSP
The downside of withdrawing from your RRSP for a downpayment is the loss of 15 years of compounded interest, unless the funds are paid back immediately.
If you are looking to buy a home in Edmonton and are interested in learning more about the options available to you, look no further than Collin Bruce. We have the knowledge and experience to help you come up with the best home-buying plan for you.