One of the most common sources of down payment funds is by accessing the RRSPs Home Buyer’s Plan. This makes homebuying possible for RSSP account holders, as they can individually withdraw up to $25,000 for the purpose of securing a home, tax-free. This loan must be repaid in 15 years and payments starts after a grace period of two years. Not everybody knows this but, one can avail this loan more than once in a lifetime, as long as these conditions are met:
Does not have a home under his name for the past four years.
Has signed a written agreement to buy a home
Expresses intentions to live in the home within the first year of purchase
Does not have an outstanding balance from the Home Buyer’s Plan
Must make a withdrawal from his RRSP within 30 days upon acquiring the title of the home.
Buying home with a partner
One good thing is that each partner can withdraw maximum $25,000 from their own RRSP accounts. This allows them to raise up to $50,000 for down payment. Again this can only be possible if both of them are fully-eligible as first-time homebuyers.
For example: Your spouse is a first-time home-buyer, while you had previously owned a home in the last 4 years, or before marriage. Your spouse can withdraw cash from her RRSP -as long you prove that you and your spouse have not lived together in that house you previously owned.
I’m not a first-time homebuyer, what now?
You can still withdraw from your RRSP even if you have owned a property before, however, this loan is now subject to tax and you must therefore include it on your income tax statement as a taxable income.
How do I get started?
Before anything else, you must be able to set up your RRSP account well in advance prior to making your first home purchase. When ready, simply first print and fill out a copy of Form T1036 available from Canada Revenue Agency's website (www.cra-arc.gc.ca). Just fill out Section 1 then forward the form to the financial institution that manages your RRSP so they can fill out Section 2. Your financial institution will send you a T4RSP form, for you to confirm how much you withdrew from your RRSP as a part of the Home Buyers' Plan. Use this form as reference your income tax return for the year you made the withdrawal.
Repaying your loan
The Home Buyer’s Plan is considered a loan, so you are expected to repay the money you withdrew within 15 years, with the first payment is expected two years after making the first withdrawal. A Notice of Assessment is sent Canada Revenue Agency to give you an update on the amount of the loan you have already repaid, the outstanding balance and an invoice to your next payment schedule. To place your payment, you must continue to make contributions to your RRSP in the year you are supposed to pay or on the first 60 days of the succeeding year.
Letting RRSP hold your Mortgage?!
Not a common practice, but you can actually try to let your RRSP hold your mortgage. RRSP can function like your lender, in which you can loan funds required to purchase a home. This is only possible if you were able to build enough cash equivalents in your RRSP that covers the entire mortgage amount. Also like a lender you will also have to commit on repaying it regularly with interest.
The good thing about this option is that it is safe and reliable in means of returns. Also one may feel that he is paying himself for the loan, rather than owing from a bank. However this option will incur additional charges like administration and setup fees, mortgage and other legal fees up to $1,000. Also you will also need to secure default mortgage insurance through CMHC no matter the size of your down payment (even more than 20%) since this financing option is not considered as a standard mortgage.Always make a comparison againsts private lenders and see who offers the best returns.