You are ready to settle down into your permanent house but there’s one thing impeding your plans: the initial down payment. In the past, first time home buyers need to save thousands of money for a home down payment. It can take years of saving before you have enough money to buy a house you can call your own.
But thanks to the Home Buyer’s Plan put up by the Canadian Government, that down payment problem is no longer a huge hurdle. This new plan states that qualified first time home buyers can now dip their hands in their RRSP or Registered Retirement Savings Plan. One person can withdraw up to $25,000 from their RRSP, a $5,000 increase from the previous $20,000 imposed by the plan. This can be used as a down payment for the new house or added up to your existing down payment savings to meet the 5% minimum down payment.
Things to Know About Using RRSP for Down Payment
Here are some interesting things to know about utilizing your RRSP funds for purchasing a new home:
1. An individual can withdraw up to $25,000 from their RRSP. If you’re married, you and your spouse can each get $25,000 to come up with a $50,000 total.
2. You can withdraw from all your existing RRSPs if you have more than one. As long as you can prove that you are the owner of the RRSP, you can utilize it. However, the total amount you can withdraw from all your RRSPs should not go over the $25,000 limit.
3. Your RRSP should be funded for at least 90 days before you can use it to withdraw.
4. The property you are buying should be used and occupied by the owner of the RRSP. The only exception to this rule is if you’re buying the house for a family member or for someone who is disabled.
5. A maximum of 15 years is given to repay the loan. It is a must to repay at least 1/15 of the RRSP funds withdrawn for down payment. Failure to pay will turn the amount into a taxable income.
6. If you’re buying another home and planning to use the Home Buyer’s Plan again, you need to pay the first one in full before you become eligible for the plan once again.
7. If your RRSP is locked-in, you can’t use it.
Advantages of the Home Buyer’s Plan
Why use the Home Buyer’s Plan and utilize your RRSP fund? First, it’s a convenient way of acquiring money and adding to the customary 5% needed for house down payment. Second, you get a tax deduction – extra money you can eventually invest on your RRSP so that’s extra savings for you.
The Home Buyer’s Plan also does not let you go without a financial plan for retirement. While you are using your RRSP for funds right now, the system automatically deducts the 1/15 payment you need to shell out for the loan. This way, your retirement savings still remains intact and you still have something to use when you do retire in the future.
How Much Down Payment Should You Put In?
With the new Home Buyer’s Plan enticing many first time home buyers into increasing their down payment, it’s easy to go overboard and shell out higher down payment than what is deemed wise.
When thinking about how much down payment you should put in, you might want to reflect on your capability to pay. In general, first time home buyers are advised to put in a 5% minimum on their down payment mortgage so as not to overburden them with expenses. The market is changing rapidly and you don’t want to dip into funds you might need in the future.
Consider your financial stability and how much money you can currently afford. Also think about your other loans such as car loans as the monthly mortgages for these can all add up.
If you’re unsure, as is the case for most first time home buyers, the expertise of a professional mortgage broker will definitely come handy. It can be easy to get lost with all these talks of money.
Finding a good mortgage broker with experience handling RRSP down payment mortgage will give you the best financial advantage. Your mortgage broker can assess how much mortgage you can pay per month without running yourself financially ragged. Your mortgage broker can also veer you in the right direction so you can save the most money and get the best mortgage deal.