According to the recent CAAMP stats, 57% of those who purchased a home in 2013 were first time buyers.  The biggest challenge most first time buyers face is putting together a down payment.The Home Buyers’ Plan (HBP), through the Canadian Government and Canada Revenue Agency, has been around for years, but is often overlooked as an effective way to help people create a down payment to buy a home.  The government allows first time buyers to withdraw up to $25,000 from their RRSP tax free, but the money has to have been in the RRSP account for at least 90 days.  The money is then paid back into the RRSP over the next 15 years, otherwise it becomes taxable.

We are just coming into RRSP season, so it is a good time to remind people about this program.  

Over the long term, the benefits of deferring taxes and earning compound interest can far outweigh the interest cost of using a loan or line of credit to contribute to your RRSP.  You can apply your tax refund against the loan or line of credit to pay down a large portion of it and substantially reduce your interest costs and payments.

Then you can use those RRSP’s as a your down payment, or a portion of your down payment, up to $25,000 tax free!

Don’t borrow more than you can repay because it may make it difficult to save for the next year’s RRSP contribution. You want to be able to pay off your balance and, if possible, begin saving for next year.

In addition to have a down payment for a new home, an RRSP loan or line of credit, like any other use of credit, will increase your debt service ratio, which is the percentage of your monthly income that goes to pay off debts. Lenders rely on this ratio to determine your loan eligibility. 

Keep your other borrowing needs (i.e. a mortgage) in mind before you take out an RRSP loan or line of credit and talk to me if you are considering a home and and using a new RRSP for the down payment. We need to make sure it is the right choice for your specific situation.