Let the Government Pay Your Down Payment! The Secret to RRSP's.
Most people buy RRSP's to save taxes and build up a retirement fund. Although that is a good reason, what if I told you there is a better reason to use this investment vehicle? If you are putting your money into RRSP's for retirement, I would argue that there are probably better methods. When you get to retirement age, this money will then be taxed. If you have any other income, then it will be taxed hard! I don't know about you but I don't want to have to pay the government up to half of what I'm getting at a time when I will be on a fixed income and want to travel and just enjoy life!
But saying that, there is a very good reason to invest in RRSP's. Would you like to buy your first home using the governments money? I will tell you how!
There are a few rules.
RULE 1: $25,000 per person can be withdrawn from RRSP's and used towards your down payment. This is called the Home Buyers Plan.
RULE 2: You must have a written agreement to buy or build a qualifying home for yourself.
RULE 3: You must intend to occupy in the qualifying home as your principal place of residence within one year after buying or building it.
RULE 4: You must be a first time home buyer (if a 4 year period has passed since you have owned a home then you are still considered a first time home buyer).
RULE 5: If you have previously used the First Time Home Buyers Plan then you can still qualify if you have not owned a home in the past 4 years and if your repayable HBP balance is 0 on January 1st assuming you have met all the other conditions.
RULE 6: The money must be deposited into your RRSP account 90 days before it can be used for the Home Buyers Plan.
So, taking those rules into account, this is what I would do to purchase my first home:
STEP 1: Optimize your RRSP's in the year you plan to buy your home (Or possibly longer if you are still a few years away from home ownership). Ask your accountant or financial advisor what the optimal contribution would be. It's not always the whole amount available; it's the amount that will give you the largest tax refund.
STEP 2: Keeping in mind each person can only withdraw $25,000 towards the Home Buyers Plan, invest your money into an RRSP 90 days or more before you plan to buy a home.
STEP 3: When you file your taxes, because you optimized your RRSP and depending on your income, you could see up to nearly 50% of that back as a refund. Now you have both this refund and the $25,000 RRSP to put towards your down payment.
STEP 4: As soon as you have an accepted offer on a home, go to your financial advisor and withdraw the funds. They will be deposited into your bank account.
STEP 4: You have 15 years to repay this 0% loan, or instead declare the portion as income on a yearly basis.
There you go! With the cost of homes these days, at least we have one way to come up with the money for a down payment. Go enjoy the many benefits of home ownership!