How to use your RRSP to maximize your down payment

Saving up a down payment for a house can be a daunting task. These days, it can take years to save enough money to afford a home, depending on a variety of personal and economic factors. However, the Canadian government has created a Home Buyers’ Plan program, which allows first-time home buyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to increase their downpayment. If you buy with someone who also qualifies for the program, it gives you up to $70,000 to spend on your home purchase.

Essentially, by using your RRSP, you are borrowing money from yourself to buy your home. Below, we’ll explain both how much down payment you need and how you can leverage your RRSP to help pay for it.

How much down payment do you need?

When buying a house and applying for a mortgage, you must have a down payment. A down payment is a lump sum of money that the borrower (in this case, the home buyer) gives the lender in cash to secure the mortgage for the property.

Many factors determine the amount of money you need to invest when buying a home. For example, if you are self-employed or have a bad credit history, the lender might ask you for a larger down payment because you are considered a riskier borrower.

Typically, a down payment will come from the buyer’s savings, as it’s better to use your capital for the down payment than to take on more debt (which can incur a high interest rate) to cover the down payment. down payment – what would take debt to pay more debt.

The money you put on your home will go towards the purchase price of the home, and the mortgage will cover the rest of the cost, which you will pay off over a set period of time, at a specified interest rate.

The minimum down payment required depends on the price of the house you are buying. However, it is generally ideal to pay at least 20% of the purchase price. If you are contributing less than 20% of the price of the house, you will need to purchase mortgage loan insurance, which protects the lender in the event of default on your mortgage.

Because down payments are percentage based, the higher the price of the home, the more money you will need to put down. Therefore, as the real estate market continues to simmer and prices rise, buyers will be required to put down more money. This is where the Home Buyers’ Plan can help first-time buyers.

What is the Home Buyers’ Plan?

the Home Buyers’ Plan (HBP) is a federal government program that gives first-time home buyers the option of withdrawing funds from their RRSP, under an agreement that they will repay the funds over a 15-year period.

The HBP allows first-time home buyers to withdraw funds from multiple RRSPs as long as your name is listed as the owner on the account. To be eligible for the HPB, you must meet specific criteria:

  • Be a first-time buyer
  • Have a written agreement to buy or build a qualifying home
  • Be a resident of Canada at the time your RRSP funds are withdrawn and until the home is purchased or built
  • Must intend to live in the home as their primary residence within one year of purchase or completion of construction

After withdrawing the funds from your RRSP, you will eventually have to repay them. The repayment period begins the second year after the funds are withdrawn and you have up to 15 years to repay the original amount. Each year, you will have to repay a specified minimum amount during this period. You can also choose to repay a higher amount, if you wish.

Before withdrawing funds from your RRSP, be sure to establish a budget for repaying the funds. If you don’t return the funds directly to your RRSP, your taxable income for that year will be increased by a corresponding amount.

Remember to consult with a trusted financial expert before making any decisions about financing your down payment to ensure you make the decision that is best for your financial situation.


About Matthew R. Dailey

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