By: Jon Lumer

Stuff Your RRSP

Tags: Buyers, Homes in Vancouver, Condos in Vancouver

Saving up for a down payment on your future home is tricky. You may not even know how much you need, and that can be very important if your goal is break into the market as quickly as possible.


For some buyers, the amount they need to put down can be as low as 5% for a home that costs as much as $500K.


That’s a mere $25K down payment.


And aren’t there other incentives offered to first-time homebuyers by different levels of government? Indeed, there are.


For example, British Columbia offers full or partial exemptions to the Property Transfer Tax for qualifying first-time homebuyers. The savings for a full exemption on the purchase of a $400K property would be $6K.


Canada is also now offering shared equity plans where the government will own a certain percentage of the home (having paid for that same percentage at purchase). Thus the buyer can afford more at the outset, although of course they will need to remit to the Federal government that same percentage of the home’s value when they sell.


Nevertheless, you will almost certainly still need to borrow money to finance the purchase of your home. And even the smallest down payment needs to be funded from somewhere…


What if you could borrow money from yourself at 0% interest?


Yes, this is a thing.


This program is called the Home Buyers’ Plan (HBP). Qualifying* first-time purchasers are allowed to take $35K out of their RRSP to purchase their home.


That’s a total of $70K for a couple.


Interestingly, that money may have been put into the RRSP over five or ten years, or longer, resulting in deferred taxes at deposit and having grown substantially over that time.


Thus a couple with enough luck and foresight, despite having very minimal savings outside of their RRSPs, may borrow $70K from their combined RRSP accounts ($35K from each account, to be clear) and have a sufficient deposit for a down payment on a $950K property. This implies a 5% deposit on the first $500K and 10% on the balance. Note that a lender would still have to agree to lend them the balance of the purchase price, having been convinced that they will meet the monthly payments (well over $4K in this case at 3% and 25-year term, leaving aside all other costs including replenishment of the RRSP).


The $70K is repaid into the RRSPs over a 15-year period. This still requires monthly payments of about $389/month, but that is as cheap as money gets. If the $70K were borrowed at 3% interest over 15 years, the total interest paid would be $17K over that period.


But if the money is left in the RRSP, won’t it grow over the 15 years anyway? Aren’t we sacrificing that growth?


Yes, but then we are back to square one. We need $70K for the down payment today. If the $70K is available, income taxes already paid, then that money could go into a TFSA and earn money interest-free from here to eternity.


Only the RRSP lets you deposit the money today** and defer paying taxes on the income, then borrow it back from yourself at 0% interest for 15 years.


The federal government is saying, if you want to buy your first house, we will defer a huge amount of income taxes to help you do it. Here is the vehicle.


That is a message worth hearing.



*You should find out what “qualifying” means whenever you are looking at these programs.


**Watch Out!!! The contributions you wish to withdraw must have spent 90 days in the RRSP account before they are withdrawn. This means you need to plan ahead.