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One great source of funding for your mortgage down payment is a Registered Retirement Savings Plan (RRSP). The Canadian government's Home Buyers' Plan allows you to borrow from your RRSP up to $25,000 for a down payment, tax-free. Since this is a loan, it must be repaid, and the repayment term is 15 years.1



First-time home buyer eligibility

In order to be eligible as a first-time home buyer, however, you must meet the following criteria:

  • Not owned a home within the previous four years
  • Sign a written agreement to buy a home
  • Intend to live in the home within one year of purchase
  • If you have used the Home Buyers' Plan before, you can not have any outstanding balance due
  • You must make the withdrawl from your RRSP within 30 days of taking title of the home
  • You must buy the home before October 1st of the year after you made the withdrawal1

Each spouse is also considered separately for eligibility as a first-time home buyer. For example, if you have owned a home in the previous four years, but your spouse has not, then your spouse would be able to withdraw money from their RRSP under the Home Buyers' Plan. If you too decide to make a withdrawal from your RRSP and have not met the first-time home buyer eligibility requirements, this withdrawal will be taxed and you must include it in your income tax statement as taxable income. If both you and your spouse meet the first-time home buyer eligibility requirements, each of you can withdraw up to $25,000 from your RRSPs, for a total of $50,000.1

In order to participate in the Home Buyers' Plan, you must print off a copy of Form T1036. This form is available from Canada Revenue Agency's website (www.cra-arc.gc.ca). You must fill out Section 1, and give the form to the financial institution that holds your RRSP so they can fill out Section 2. Your financial institution will send you a T4RSP form, which will confirm how much you withdrew from your RRSP as a part of the Home Buyers' Plan. You must reference this form in your income tax return for the year you made the withdrawal.1



Repaying the Home Buyers' Plan loan

Since the Home Buyers' initiative is considered a loan, you must repay the amount you withdrew from your RRSP within 15 years, with the first payment due two years after you first withdrew the money. Canada Revenue Agency will send you a Notice of Assessment, which will indicate the amount of the loan you have repaid, the balance left to be repaid, and the amount of your next payment. To start repaying the loan, you must make a contribution to your RRSP in the year the repayment is due or in the first 60 days of the following year.1



Holding your mortgage in your RRSP

Though not commonly done, you do have the option to hold your mortgage within your RRSP. This is only possible however, if you have built enough cash, or cash equivalents in your RRSP to cover the entire mortgage amount. Your RRSP essentialy becomes the bank or lender, loaning you the funds required to purchase your home in exchange for regular interest and principal payments. 

To understand how this works, we will look at an example where Mitch is purchasing a $400,000 home, with a down payment of 20%:

Step 1:
Down payment comes from personal savings
$400,000 * 20% = $80,000
Step 2:
Remaining balance is borrowed from RRSP
$400,000 - $80,000 = $320,000
Step 3:
Amounts are combined and given to seller
$400,000 is given to seller
Step 4:
Mitch sets his interest rate to the market rate
For this example we'll use 4%
Step 5:
Mitch sets his amortization period
For this example we'll use 25 years

Step 6:
Calculate the monthly payment

Monthly payment = $1,683.27
Step 7:
Monthly payment paid into RRSP over the next 25 years
$1,683.27 * 12 months * 25 years = $504,981

Over the next 25 years, Mitch will pay $1,683.27 into his RRSP each month. At the end of the 25 years he will have paid a total of $504,981 with $320,000 to cover the mortgage principal and $184,981 in interest payments.

The interest portion of this amount is tax free because it is held within his RRSP, and the rate of return on the $320,000 from Mitch's RRSP will be 4% over the 25 year period.



Advantages of holding your mortgage in your RRSP

The advantage of holding your mortgage in your RRSP is that it has a safe and reliable rate of return. It is essential to compare this rate of return against the opportunity cost of investing your RRSP into other assets. Some individuals also like the fact that they are paying themselves interest instead of the bank.



Disadvantages of holding your mortgage in your RRSP

It is also important to consider the disadvantages associated with this strategy. First of all, you must be prepared to pay the administration fees, such as setup fees, trustee/mortgage administration fees, RRSP fees and legal fees, which can reach upwards of $1,000.2

Secondly, you must obtain mortgage default insurance from CMHC regardless of the size of your down payment. With traditional mortgages, home buyers are only required to take out mortgage default insurance if their down payment is less than 20%. If you hold your mortgage in your RRSP however, you must purchase CMHC insurance even if your down payment is 20% or higher. CMHC insurance is calculated as a percent of your mortgage amount as follows:

Amortization period Downpayment (% of home price)
5-9.99% 10-14.99% 15-19.99%  20-24.99%  25-34.99%
35 or higher
31-35 years
3.15%
2.40%
2.15%
1.40%
1.15%
0.90%
26-30 years
2.95%
2.20%
1.95%
1.20%
0.95%
0.70%
25 years or less 2.75% 2.00% 1.75% 1.00% 0.65% 0.50%

 

Finally, if your entire RRSP amount has been used to hold your mortgage, you are committing your entire portfolio to a fixed income rate of return.

[1] Canada Revenue Agency Agency. "Home Buyer's Plan (HBP)". Govt. of Canada, 05 January 2010. Web. 18 November 2010.

[2] Banerjee, Preet. RRSPs: 41 Strategies Canadians Need To Know About Our Country's Single Greatest Tax Planning Tool. Lulu.com, 2008. Print.



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