How to use your RRSPs as a Down Payment

The Federal Government has a Home Buyer’s Plan that lets First-Time Home Buyers withdraw money from their RRSPs to use towards a down payment for a home - without being penalized.  However, there are some restrictions:

·         You must be a First-Time Home Buyer.  According to the fine-print of this plan, a First-Time Home Buyer is anyone who has not owned a home that has been used as a principal residence within the last 5 years. (Note: the defini tion of a First-Time HomeBuyer differs when talking about Property Transfer Tax, which I will explain later)

·         The maximum withdrawal is $25,000 per person (max. $50,000 per couple)

·         You must live in the home (ie. It must be your principal residence)

·         You must repay the money withdrawn from your RRSPs within 15 years

·         The money that you take out of your RRSPs must have been invested into your RRSPs for more than 90 days before withdrawal

Withdrawing your RRSPs is a great way to access cash that you’ve already saved up.  Just make sure you pay the money back within 15 years.

Acceptable Sources of Down Payments

A Down Payment may come from a variety of sources, including:

1.      Savings

2.      Home equity

3.      A gift from an immediate family member

4.      RRSPs

The first source, savings, is pretty straight-forward.  The bank* may want to see a history of your savings to ensure that the money you are using for your down payment is coming from your own resources (earnings) and that you will not have to pay anyone back.  This can usually be proven through bank statements.

I wrote about home equity earlier, so you should be familiar with the term.  If you are transferring your mortgage or refinancing, you can use the equity in your home as a down payment.

A gifted down payment must come from an immediate family member.  The bank will want to see a signed agreement between you and the family member stating that the family member is giving you the money and he/she does not expect you to pay him/her back.  The gift letter should also include the full name, contact information and relationship of the donor. 

*A note/disclaimer: I realize that I have been using the term “the bank” quite often in my writing and this may seem misleading to some.  To clarify, when I say “the bank”, I actually mean this to represent any number of lenders.  These lenders could be banks, credit unions, mortgage investment companies, private lenders, etc.  In my day-to-day dealings, I have noticed that most people just refer to lenders as “the bank”, since this term is used so often in our daily conversations and since “the bank” was where people traditionally used to get their mortgages in the past.  I will continue to use the term “the bank” in this blog for ease of explanation.