RRSP Home Buyers' Plan & A Free Downpayment!

It is that time of year, when many Canadians rush to make their RRSP contributions prior to the deadline for the previous tax year. The RRSP home buyers' plan for first time home buyers is a great program to access money tax free money for downpayment purposes. Contributing to your RRSP prior to the deadline will achieve the following:

• Increase downpayment from RRSPs up to $25,000 per person
• Reduce taxable income and possibly generate a tax refund (free money) which can be used for downpayment or closing costs

RRSP Home Buyers' Plan Fine Print

You are right, there is fine print to be aware of:

• One must not have owned a home in the last 5 years. Verify with a qualified real estate lawyer your situation in the cases where one borrower has owned a home and other has not.
• Money deposited into RRSPs has to stay in the account for 90 days prior it is taken out
• Money taken out of the RRSPs has to be used for a home purchase and you have to have an agreement of purchase & sale in place (form T1036 needs to be completed at time of withdrawal for declaration purposes to CRA)
• The purchased home is your primary residence and not an investment property
• The monies have to be paid back over 15 years. If you don't pay it back it is considered taxable income. Should you payback your RRSP home buyers plan?

You can find more details on the RRSP home buyers on Canada Revenue Agency's website.

To discuss your mortgage financing needs whether you are buying a home, an investment property or renewing your mortgage, please contact Nawar.

Don't Payback Your RRSP Home Buyer's Plan!

RRSP Home Buyer's Plan is a great tool for first time home buyers to access money for the downpayment of their first home. The maximum allowed withdrawal is $25,000 per person which has to be paid back over 15 years. I will save the details of the RRSP Home Buyer's Plan for another blog post. Here is a controversial idea: Don't payback your RRSP Home Buyer's Plan back! Let me explain.

RRSP Home Buyer's Plan Scenario

• Mortgage amount: $300,000
• Interest Rate: 5% (mortgage rates are much lower now, but I want to use a reasonable interest rate over the life of the mortgage)
• Amortization: 25 years
• Required RRSP Home Buyer's Plan Payback: $138.89 monthly ($25,000/15 years/12 months per year)

My suggestion is not to payback into the RRSP but rather put the $138.89 into the mortgage above and beyond the normal monthly payment. If one pays $138.89 extra into the mortgage, after 15 years the results would be:

• Mortgage balance would be at $127,929 vs $164,894 (savings of $36,965 in principal and mortgage amortization is reduced to 22 years & 4 months from 25 years)
• 47.86% Return on investment: $25,000 of RRSP Home Buyer's Plan generated mortgage principal savings of $36,965
• First time home buyers saving 32 months of mortgage payment (25 years less 22 years & 4 months): $1,744 x 32 months = $55,808 which could be invested into RRSPs then

Since the first time home buyer is not paying the RRSP Home Buyer's Plan back, their income tax would rise by $1,666.68 ($138.89 x 12) annually. Assuming they are in the 45% income tax bracket, their income tax would rise by $750.

I realize this concept might be controversial and some might disagree with, but I hope the above numbers present a case for consideration. Paying down or paying off debt is an important step in achieving financial freedom. I would love to hear from you whether you agree or disagree.

Disclaimer: I am not a licensed financial planner and you should consult with your own financial advisor/planner prior to making any investment decisions. This is article is my personal opinion.

To discuss your personal mortgage financing needs whether you are buying a home, an investment property or renewing your mortgage, please contact Nawar.