In February of 1992, the Canadian Federal Government introduced the "Home Buyers' Plan" (HBP), which allows RRSP planholders who are also first time home buyers to use up to $20,000 of their RRSP to apply to the purchase of their home. The plan, extended twice, is in effect as of July 1997 until further notice.
Up to two partners in the home can combine their RRSP's for a total maximum of $40,000. The only subsequent requirement is that they pay the withdrawals back into their plans (without further deductions) over a maximum of 15 years. Failure to do so will result in 1/15th of the RRSP initially withdrawn having to be added back to taxable income in any year the minimum re-deposit is not made.
One very good feature of the HBP, exploited by several of the major financial institutions (usually in cooperation with major Real Estate chains), is the ability to borrow money to top up your RRSP plan using accumulated RRSP eligibility limits. If your tax
Assessment notice indicates you are eligible for, say, $18,000 in contributions in the current year, and you already have $4,000 in a self-directed plan, these institutions will lend you - subject to a credit check - the $16,000 to buy the RRSP required to bring you up to the $20,000 HBP limit. You may wish to borrow the whole $20,000 to obtain the maximum tax deduction.
A loan for the RRSP to be used as your
Down Payment allows you, in effect, to borrow your down payment over the next 15 years.
The idea is then to claim the eligible deduction against your current year's income in order to get a large tax rebate. This rebate can then be used either to pay down the loan, or applied to the cost of buying the home. Here, of course, the amount of tax you're paying each year is an important factor. If the $16,000 deduction in this example results in, say, a $5,000 tax rebate, then that's all the "free cash" you actually net from the process.
If, on the other hand two partners each earning $80,000 per year take their maximum RRSP of $20,000 each in the current year, they could net $15,000 or more "free cash" in total.
You are then allowed to withdraw up to the $20,000 maximum from the RRSP 90 days after topping up or creating the plan, subject to the re-deposit requirements described above.
Here's the catch for those thinking of borrowing the money for the maximum RRSP: Unless you're planning to repay the RRSP loan quickly, or are able to extend the terms significantly this has the effect of greatly increasing the monthly payment, thus decreasing the chances of qualifying for a
Mortgage because of much higher "total debt servicing ratio". This is the proportion of your gross income required to service both the home related costs and other monthly obligations - usually a maximum of 42%. Another $600 per month could well make the difference in whether or not you'll qualify for a mortgage.
Mortgage avance and counsel > First Time Home Buyer
