Using Your RRSPs to Purchase a Home
Make sure you take into account all the rules and associated costs before you start tapping into your RRSP funds.
The plan allows you to borrow a maximum of $20,000 from your RRSP to buy a house. You don't have to pay tax on the money you withdraw to use as part (or all) of your down payment, nor do you have to pay interest on the money while it's outside your plan. Both you and your spouse or partner can take advantage of the Home Buyers’ Plan, so in total, you could drum up $40,000.
The government has a number of conditions on the Home Buyers’ Plan
- To qualify, you and your spouse must not have owned a home within the past 5 years, together or individually.
- You must pay the loan back to your RRSPs within 15 years, with payments beginning the second year after you withdraw the funds.
- You must be a resident of Canada and intend to make this home your principal residence.
- The money must be in your RRSP for at least 90 days before you can withdraw it under the plan.
- You must buy or build a home by October 1 of the year following your withdrawal.
- You will also need a written agreement to purchase and a T1036 form from your lender or Revenue Canada
The key requirement is that you have to replace what you've taken out of your RRSP to buy a home. And you're required to repay a minimum amount each year — the equivalent of one–fifteenth of the amount you originally borrowed.
The Down Side
The response to the plan has been overwhelming. But there are a couple of drawbacks that may not be immediately apparent. To begin with, you must have ready cash in your plan. You may find it is tied up in GICs that cannot be cashed in until they mature. Another point to consider is that neither you nor your spouse are allowed to make an RRSP contribution in the year that you withdraw money under the plan. This is to prevent you from making a contribution, getting your tax deduction, and then withdrawing the money to use as a down payment. Remember that if you have been building the tax refund from regular RRSP contributions into your budget each year, you need to make sure you can get by without the extra cash flow.
Penalties
As noted above, you have to repay a minimum of one–fifteenth of the amount you take out of your RRSP each year, starting 2 years after you make your withdrawal. The penalties are high if you don't make the required repayments. If you miss a payment, or even part of a payment, the government will act as if you had simply withdrawn that money from your RRSP, and add it to your taxable income for that year.
Less Diversification
Withdrawing money from your RRSP to invest in a home also leaves your holdings less diversified than they might have been — and diversification is the cornerstone of sound investment.
Repayments and New RRSP Contributions
Repayments of money you've borrowed from your RRSP to buy a home are not considered RRSP contributions and cannot be deducted from your income. If repaying the loan makes it impossible for you to also contribute to your RRSP, it may prove costly, indeed. Not only do you lose the compound growth you would have earned on the dollars you take out, you also forego the growth on new contributions you might otherwise have made.
However, if your new home appreciates nicely, the growth in its value will offset some of the growth you've foregone in your RRSP.
The biggest cost of a loan under the RRSP Home Buyers’ Plan is the loss of compound growth inside your RRSP on the money you withdraw.
Just how much growth you sacrifice will depend on how old you are. The cost to our retirement savings also depends on your age. The younger you are, the more time your RRSP would have to grow, and therefore the greater the cost of withdrawing the money. The older you are, the less time your savings have to enjoy compound growth, so the amount lost is lower.
In the end, your decision may turn on personal, not financial, considerations. You may want to buy a home now rather than wait until you can save a big down payment. Just make sure you understand that while this plan may help you realize the dream of owning your own home, it has its costs.