Using Your RRSP as a Downpayment
If you're having difficulty
putting together a downpayment to
purchase a home, a special government
program called the Home Buyers' Plan can help.
What is the Home Buyers' Plan?
The Home Buyers' Plan (HBP) is a
federally instituted government
program designed to assist "qualified"
buyers in the purchase of a new
home. As a "qualified" buyer, you are allowed to withdraw
funds from your RRSP to use as a
downpayment in the purchase of a
home, without incurring a penalty.
Guidelines for using the HBP
Regardless of there being no penalties
for withdrawing funds, there are
certain guidelines that must be
followed in order to use the HBP.
-
You may only withdraw a maximum
of $20,000 from your RRSP.
-
There can be a maximum of two first-time
buyers in the purchase of a new
home, and each individual can withdraw
up to $20,000 for a total of $40,000.
-
The purchased home must be owner
occupied.
-
The RRSP must be repaid within 15
years with minimum annual payments
of 1/15th of the withdrawn amount — failure to do so will result
in 1/15th of the RRSP initially
withdrawn having to be added back
to taxable income in any year the
minimum re-deposit is not made.
-
You must not have owned a home within
the past 5 years immediately prior
to participating in the HBP.
The HBP also permits you to establish
an RRSP with borrowed funds, and
then use the resulting tax refund
for a down payment. (And, as you
may have read in Qualifying for
a Mortgage: The Four Factors, the
size of your downpayment matters!)
In this scenario, you would borrow
funds that are contributed to an
RRSP. After a 90-day period, the
RRSP is collapsed to repay the
loan.
When you receive your tax refund,
it can be applied to the purchase
of a home. These funds are considered
as an acceptable source of down
payment provided that the tax refund
is in your hands at the time of
closing and the lender can verify
that you have other, liquid assets
equal to 5% of the purchase price. Participating in the HBP multiple
times
Until 1999, the program was available
only once and you had to buy or
build the qualifying home for yourself.
However, the rules have changed.
You can participate in the HBP
more than once in your lifetime.
To re-participate in the HBP, your
balance from your previous withdrawal
must be fully repaid by the beginning
of the year you want to re-apply.
In addition, the federal government
allows people with disabilities
to participate in the Home Buyers'
Plan to buy or build a more accessible
home.
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