Stéphanie Simpson, Mortgage Broker
September 19, 2018
The HBP (Home Buyers’ Plan) allows first-time buyers to withdraw from their RRSPs to purchase a property. The basic rules are relatively simple:
1) Cannot have owned in the past 5 years
2) Withdraw a maximum of $25,000 from your RRSPs ($50,000 for a couple).
3) Repay the amount withdrawn within 15 years maximum;
4) Contributions must remain in the RRSP account for at least 90 days;
5) You can withdraw your RRSP up to 30 days after being declared the “owner”;
Here is an example:
Your offer to buy the condo you’ve been looking for for weeks in Hochelaga has finally been accepted at $285,000. Your mortgage broker informs you that the minimum down payment is 5%, or $14,250. You have $5,000 in a TFSA (Tax-Free Savings Account) account and $18,000 in an RRSP account. You decide to withdraw your RRSP in full, in order to have enough cash for the down payment, the notary fees, the 9% tax on the premium of the insurer, as well as the transfer taxes. Note that withdrawn funds do not have to be used as a down payment. It is possible to use them for related expenses connected to the purchase of your property. In 2020 (after a year off), you will have to deposit a portion of the original $18,000 back into your RRSP.
$18,000/15 years = $1,200 per year (minimum)
You may not have been able to accumulate the necessary funds in your RRSP and you want to increase your down payment, or your financial institution may require a larger down payment to authorize your mortgage. In this case, the HRP loan can prove to be a very interesting tool!
Here are 3 ways to use the HBP loan strategy with a contribution of $25,000:
1) Investing $25,000 in your RRSP will give you a tax refund of about $10,000 (at a 40% marginal tax rate). This amount may be added to your available down payment for your purchase. Take note that in this scenario you will have to repay the $25,000 loan. In addition, it should not be forgotten that this commitment will be added to the contribution you will have to make over 15 years.
25-year RRSP loan over 5 years at 5% = $471.78 per month
RAP to repay: $25,000/15 years = $138.89 per month
= $610.67 per month
Do not forget to add this $610.67 to your budget for the first few years, unless you are able to repay your RRSP loan before the term expires.
2) You can also choose to use the $10,000 tax refund to repay a portion of your RRSP loan, but you will have less cash available than in the first example. In this way, your refunds will be as follows:
RRSP loan: $15,000
3) Another strategy would be to use the $10,000 tax refund as a down payment and use the HBP to repay your RRSP loan. In this variant, you will not have a loan to repay, but only the $25,000 HBP over 15 years.
While RRSP lending is still a great alternative to make up for a down payment, it’s important to talk to your mortgage broker or financial advisor to make sure it’s the best option. According to your financial situation and your needs, your expert will be able to analyze the possible economies to increase the down payment to avoid the premium of the insurer or to ensure that such additional repayments can be supported by your lifestyle and your budget. The HBP loan remains a subject very questioned by the first buyers, so do not hesitate to contact us if you have any questions.
While RRSP lending is still a great alternative to make up for a down payment, it’s important to talk to your mortgage broker or financial advisor to make sure it’s the best option.