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Using Your RRSP To Buy A House

ImageOwning a house is one of the best investments you can make. Your principle residence is exempt from capital gains tax. Real estate gains usually far exceed mutual funds and they are more secure than investing in stocks.

In summary, you can borrow money from your RRSP, and use that to buy your home. You have to pay it back over a 15 year period. If you don't pay it back according to the schedule, you are taxed on the money instead.

Most wealthy people have significant real estate in their portfolios because it is such a good investment. And the Government of Canada wants it's citizens to own their own homes too. Thus, we have the Federal Home Buyers Plan (HBP).

With some restrictions you can withdraw up to $20,000 from your own RRSP to buy a principal residence and not pay tax. A couple can withdraw up to $40,000.

You are required to buy your RRSP's  back again over a fifteen year period. Which roughly translates (if you withdraw the maximum) to buying back $1,333.33 of RRSP's per year. You don't get to deduct on your tax return again as you have already deducted them in the past. You do not begin buying back the RRSP's for two years.

ImageIf you do not buy back the designated amount of RRSP's in a particular year then that amount is included in your income and taxed for that year. As per the example above if after two years you do not buy back the $1,333.33 and designate it for your HBP then you would be taxed on an additional $1,333.33 in your tax return that year or any year in the fifteen you do not buy back the $1,333.33.

Almost half of today's first-time home buyers use their RRSP savings to help finance a down payment. It can help on several fronts.

  1. You find money you perhaps did not have available to you. Not everyone has funds outside their RRSP available for the down payment.

  2. Most banks won't lend you 100%, for a no-money down purchase. You need something to come to the table with.

  3. If you have less than 25%, you have a high ratio mortgage, and are subject to additional CMHC insurance fees. The money from the RRSP can help get you over the 25% limit so you can avoid those fees.

Quick Link: get the forms here
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Some tips to consider:

  1. Only borrow as much as you need. If your money is no longer in your RRSP, it is no longer growing. To reduce the amount you borrow will reduce the amount you have to repay.

  2. Make sure you do repay the RRSP. If you don't you will lose that opportunity to get the funds back into your RRSP forever. You will also end up paying tax on the money you did not repay.

  3. If you can find other sources of funds for your down payment, you may be better off leaving the funds in your RRSP. For the duration you borrow from your RRSP, those funds are not growing within your RRSP.

  4. In addition to repaying the funds into your RRSP, try and make additional contributions into your RRSP, which will get you a tax deduction.
Buying a house and/or borrowing from your RRSP is a significant thing to do. This article is not meant to be comprehensive, and is more to open your eyes to the options. Please consult with a qualified advisor regarding such things before you commit to anything. If you have any questions, please comment below or click on my name to send me a message privately.

Pat

 
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