My husband and I are planning to purchase a house in the spring. We live in an expensive market and have only enough saved for a 5 percent down payment. We do have a bit of savings in our RRSP, though. Is it a smart move to borrow from our RRSP using the Home Buyers’ Plan to boost our down payment?
— Jessica, Vancouver
Yes. In general, using the Home Buyers’ Plan (HBP) to increase your down payment makes sense, in part because it allows you to reduce the cost of mortgage insurance through the Canada Mortgage and Housing Corporation.
If you buy a $400,000 house with a 5 percent deposit ($20,000), you’ll pay an insurance premium of about $12,000. If you can come up with a 10 percent deposit ($40,000) by using money from your RRSP, that premium falls to about $8,600. And you might be able to take the HBP even further. If you have lots of contribution room, you could consider contributing your down payment to your RRSP now. This will trigger a tax refund allowing you to raise your down payment even more.
After 90 days you can pull that money back out under the HBP. All that said, remember RRSPs are for retirement. The money you borrowed won’t start compounding until you pay it back. And you need to make sure that you’ll have the cash each month to continue to contribute to your RRSP and to pay the HBP back over the next 15 years. If you don’t repay it, the amount will be added to your income and you’ll have to pay tax on it, which defeats the purpose. Ask your mortgage lender to show you some numbers and see what makes the most sense.
Bruce Sellery is a personal finance expert and author of the bestselling book The Moolala Guide to Rockin’ Your RRSP. He’s a columnist for MoneySense magazine and a regular guest on Cityline and the Lang & O’Leary Exchange. Read more at moolala.ca.
Have a question about your finances? Email Bruce at email@example.com