First Time Home Buyer – RRSP Down Payment Strategy

There is a window of opportunity during January and February of each year where a first time home buyer can utilize this often forgotten strategy and take advantage of their RRSP to increase the down payment for a home purchase and securing your best mortgage.

As you are probably aware, a qualified first time home buyer can withdraw funds from an RRSP for the purchase of a home under the Government of Canada Home Buyer Plan (HBP). There are 6 key points to remember when using an RRSP for a home purchase:
1. You can withdraw up to $25,000
2. The funds must be in your RRSP for at least 90 days prior to the withdrawal under the Home Buyer Plan (HBP)
3. The funds can be withdrawn up to 30 days after the possession date of your home, but not more than 30 days
4. You can make multiple withdrawals in one calendar year under the home buyer plan
5. The funds withdrawn must be paid back over 15 years, calculated as 1/15th of the total amount each year
6. The RRSP repayment starts the second year after the year of the withdrawal

When purchasing a home, the first time home buyer will typically need to give a down payment of 5% of the purchase price and the balance of funds to close the sale (95% of the purchase price) will be made up by way of a mortgage.

This first time home buyer RRSP home buyer plan (HBP) withdrawal strategy is simple and requires a little planning prior to finding the home you wish to purchase. This strategy works best for an individual who is in a high marginal tax bracket and who has unused RRSP contribution room.

Client Example:
A client, Dave is earning $85k per year, has a marginal tax rate of 36% and has an unused RRSP contribution room of more than $25k. He has been saving money, approximately $10,000, that he plans to use as a down payment for the purchase of a home. He wishes to purchase a home for approx $300k. He has been pre-approved for a mortgage of $285,000 but is short of the minimum 5% down payment ($15,000) by $5,000. He would like to purchase a home in the spring: April or May.

In January, Dave visits his local bank and arranges an RRSP Loan for $15,000 (the maximum RRSP withdrawal for a first time home buyer of $25,000 minus his current savings of $10,000) and is approved. He sets up the RRSP and deposits the savings of $10,000 and the additional $15,000 that he received as an RRSP loan.

When Dave files his Income Tax Return for the previous year he will receive a tax rebate. The $25,000 RRSP Contribution will give him a tax credit, with a marginal tax rate of 36%, this would result in an income tax rebate cheque of $9,000.

Dave can then take his income tax rebate cheque of $9,000 and pay down the RRSP loan, resulting in a loan balance of $6,000. Once Dave finds a suitable home, he can withdraw the $25,000 from his RSP and pay off the remaining balance of his RRSP loan. The net balance of funds available to Dave for the purchase of his first home is now 19,000!

By utilizing this, often forgotten, RRSP strategy, Dave has increased his savings from $10,000 to $19,000. He now has more money that he needs, therefore can take a smaller mortgage or use the extra cash to get some furniture for his new home. Would this HBP strategy work for you or someone you know?

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