Should You Use Your RRSP To Buy Your First Home?

Purchasing your first home can be tough, especially when it comes to scrounging up a sizable down payment. In Canada, you must be able to cough up a 20% down payment in order to avoid purchasing costly mortgage insurance. If you’re struggling to find enough cash to meet this requirement, don’t throw in the towel quite yet. Under the Home Buyers’ Plan (HBP), first time home buyers in Canada can borrow up to $25,000 tax free from their registered retirement savings plan (RRSP) in order to help with their down payment and lower their monthly mortgage requirements.

Do You Qualify for the Home Buyers’ Plan?

There are a number of conditions that home buyers must meet before they can take advantage of the Home Buyers’ Plan:

  1. You must be considered a first time home buyer.
  2. You must enter into a written agreement to buy or build a qualifying home.
  3. You must intend to occupy the qualifying home as your principal place of residence no later than one year after buying or building it.
  4. You must be a resident of Canada when the withdrawal is made.
  5. You must receive all withdrawals from your RRSP in the same calendar year. 

Under the Home Buyers’ Plan you must repay all of your RRSP withdrawals within a 15 year period. Your repayment period begins the second year following the year that the funds were withdrawn.

The following are a few important things to remember when considering the Home Buyers’ Plan financing route:

The Good

  • Using your RRSP to help increase your down payment can help you avoid paying mortgage insurance, and can even help you qualify for a lower interest rate.
  • If your buying a home with a spouse or common-law partner, they can also pull up to $25,000 from their RRSP.
  • A larger down payment will help lower your monthly or bi-weekly mortgage payments.
  • This is one of the few ways you can withdraw money from your RRSP without being taxed.
  • The Home Buyers’ Plan is a great option for young adults who may not have a lot in terms of savings.
  • There is no penalty associated with repaying more each year than what your scheduled payment amount is.
  • Your RRSP loan is considered tax-free and interest-free for a 15 year span.

The Bad

  • Pulling money from your RRSP will cause you to lose years of compound growth, depending on how quickly you are able to reinvest your money.
  • The Home Buyers’ Plan is still a loan, only instead of owing a bank of credit card company, you owe your future. Failure to pay back your RRSP investment in a timely manner could hurt your retirement plans.
  • If you are unable to make your repayment each year, the unpaid amount is fully taxed as income for the year.
  • If you are forced to declare bankruptcy, you will still need to make payments back into your RRSP each year.

For more information about the Home Buyers’ Plan, eligibility and rules, please visit the Canadian Revenue Agency’s website. If you’re planning on taking advantage of the Home Buyers’ Plan when buying your first home, make sure you notify your Canadian mortgage broker. He or she may be able to find you a better mortgage rate based on your increased down payment.

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