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Consider the 'Bank of You' for your first mortgage Add to ...

Rahim Jiwani started saving for retirement as a teen, when his father got him started with an RRSP and, initially, helped to make regular deposits into it.

Seven years ago, when Mr. Jiwani, now 37, decided it was time to buy a condominium in downtown Hamilton, Ont., he took advantage of the Home Buyer's Plan to withdraw money from his RRSP to put toward the down payment.

"It was a good thing to do," says Mr. Jiwani, a financial adviser with Investors Group in Mississauga, Ont. "You have 15 years to pay it back, and you can use money you would have borrowed (from the bank) for the down payment or to buy furniture or to set up a household emergency fund."

The plan allows an eligible individual to remove up to $25,000 from their RRSP on a tax-free basis to buy or build a first home. A person's spouse can also withdraw up to $25,000 to put toward the purchase. That combined $50,000 can help couples cobble together a large enough down payment to avoid having to pay Canada Mortgage and Housing Corporation insurance, and is one of the attractions of going this route to finance a first home.

To be eligible for the plan, you must have a written agreement to buy or build a home that will be your primary place of residence, according to the Canada Revenue Agency website. Disabled people and those who support them (such as their parents) can participate in the plan without having to qualify as a first-time buyer.

The money must be fully repaid into your RRSP within 15 years, with the repayment period starting the second year following the year you made the withdrawal. Each year you would pay back at least 1/15th of the total amount you withdrew until it is repaid in full. Accelerated repayments are allowed, so you can replenish your RRSP faster than that if you wish.

The Tax Hit

Beware: If you don't repay the amount that is due for a given year, the government counts it as part of your income that year and taxes it accordingly.

Some people opt not to repay the money and take the tax hit. Financial planner Sharon Rizzuto, with Burgeonvest Bick Securities Ltd. in Grimsby, Ont., says this sometimes happens in situations where, for example, one partner withdraws money from the RRSP to help finance a home purchase knowing that he or she is going to be a stay-at-home parent with little or no income. So the tax consequences of not repaying it in a given year are going to be minimal.

One other rule is that the money you withdraw must have been paid into your RRSP at least 90 days before you can withdraw it. Mr. Jiwani says this feature makes it an attractive option for anyone who knows they're going to be buying a home in the near future. "If you're going to be using that money for a down payment anyway, you can put it in an RRSP and get a tax deduction for the amount," and then take it out again after 90 days to put toward the down payment. Then you can use the money you get back from the tax refund to pay down your mortgage or to repay the RRSP withdrawal, he says.

Disadvantages

The biggest drawback to the Home Buyer's Plan is that the money you've withdrawn won't be compounding during the 15 years it takes to repay. That's why Ms. Rizzuto encourages her clients to find other ways to finance a home purchase. "Obviously, sometimes people don't have a choice," she says, but if you do opt to use the plan it's best to repay the money into your RRSP as quickly as you can so the funds can start growing again.

The compound income you lose out on can be significant. If you leave $25,000 inside an RRSP to grow for 25 years, earning 8 per cent annually, it will reach $171,212. But if you withdraw $25,000 from an RRSP to buy a home, and repay $1,667 per year (starting at the beginning of the third year after withdrawal) each year for 15 years into an RRSP that is growing at a rate of 8 per cent annually, your RRSP's value after 25 years would be $90, 462.

So the cost of using that $25,000 to buy a home instead of leaving it to compound tax-free would be $80,750.

That might not be a bad tradeoff if the value of your newly purchased home increases proportionately over the 15 years. But it's a gamble. "House prices don't always go up," notes Ms. Rizzuto.

During the recent recession, real estate values dropped in many places, resulting in houses being worth less than what their owners paid for them. Dipping into your RRSP to buy a home that ends up being worth less than what you paid for it, or doesn't appreciate as you'd hope, means you've taken a big hit.

And if it comes to a choice between accelerating your plan repayment and accelerating your mortgage payments, pay yourself first, Ms Rizzuto says. "Who is more important - you or the bank? If you repay the bank back faster it'll just lend the money to someone else and make more money," whereas you'll be losing out on tax-sheltered growth for as long as it takes to put the money back in your RRSP.

Do the math for a variety of home-financing scenarios well in advance of making any decisions, the planners say, so you'll be able to choose what's best for you and your long-term goals.

Special to The Globe and Mail



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