Most people dream of owning a house one day. For some, this dream home is a cozy cottage. While for others, a penthouse is an ultimate dream. Whether the house is big or small, purchasing a home is no small expense. Very few of us have the money to pay for a house in full. So, home loans are one of the most common types of loans. However, before you take out a home loan, did you know that you could borrow money from your RRSP account to buy a house?
The RRSP homebuyer’s plan
The objective of your RRSP account is to save money for retirement. However, there is nothing stopping you from making withdrawals at an earlier date. In some cases, this amount will be taxed. While in others, it will not. For example, the government’s RRSP Home Buyer’s Plan allows first-time homebuyers to withdraw up to $25,000 from their RRSP account towards paying for a house. This withdrawal is not taxable, but the entire amount must generally be repaid within 15 years. Typically, banks will require annual payments amounting to 1/15th of the withdrawn amount. If you want, you could automate this payment to ensure that you do not default on payments.
Not everyone can use money from their RRSP account to buy a home without paying taxes. To be eligible you must fulfill all of the conditions listed below. This must be the first home you are buying. RRSP withdrawals to buy a second home are taxed.
- The amount must have been deposited for at least 3 months.
- A signed agreement to build or buy a home must be provided
The advantages of withdrawing money from your RRSP
A significant advantage of withdrawing money to pay for a house is that you can put down a larger down payment. This reduces the size of the loan you will need to take out and thus the amount of interest you will have to pay. It can also help you arrive at the 20% down payment required to avoid having to pay a default insurance premium. This money is also withdrawn on a tax-free basis, but if it is not properly repaid into the RRSP it will become taxable income.
However, think carefully before withdrawing funds from your RRSP. Speak to a financial advisor to ensure that this is the best plan for you. Determine how you will repay the borrowed amount each year while maintaining your usual RRSP contributions. You should also know that a premature withdrawal from your RRSP affects the future growth potential of your account. When you withdraw money from your RRSP account, you also lose the privilege of carrying over unused contribution amounts from one year to the next. This can affect your RRSP contribution limit.
The best thing to do in such situations is to talk to a financial advisor. They can help you assess the situation objectively.
This post contains sponsored links from Sun Life Financial.