Using your RRSPs for a home down payment

What’s an RRSP?

Registered Retirement Savings Plans (RRSPs) are one of the most popular ways to save, with millions of Canadians making contributions every year. There is a maximum contribution limit each year, but unused room is available for future deposits and, most importantly, contributions are tax deductible. Although they're primarily intended for retirement, first-time home buyers can withdraw up to $35,000 from their RRSP savings to put toward a downpayment through the Home Buyers’ Plan.

How much do you need for a down payment?

Aside from rising interest rates, prices for homes themselves are also rapidly increasing. In just the past three years, the average cost for a house rose by almost $100,000 across Canada, or even more in major cities. This makes funding a down payment even more challenging.

Typically, the minimum down payment for a home ranges from 5% to 20% of the total price. If a property costs less than $500,000, the smallest amount you can pay as a deposit is $25,000, which is 5%. However, since the average price tag on a house across the country is $704,000, you're likely to spend more as a first-time home buyer. In that case, the down payment is calculated by taking 5% of the first $500,000 and 10% of the amount over $500,000. If a home costs over $1 million, the minimum down payment is simply 20% of the overall price.

Down payments of less than 20% generally require the purchase of mortgage loan insurance. If you’re self-employed or have a lower credit score, you might have to purchase this insurance anyway. The cost depends on your down payment and your province, and you may also have to add sales tax to the insurance premium.

Introducing the Home Buyers’ Plan

The Home Buyers’ Plan lets you withdraw up to $35,000 from your RRSP tax free to put toward your down payment. If buying as a couple, each person may be able to withdraw RRSP savings for a total of $70,000. Although the money isn’t taxed, it must be paid back to the account within 15 years, beginning the second year after withdrawing the money. You must pay at least 1/15^th of the amount back each year (about $2,333 if you withdrew $35,000) but can pay more. If you pay less, or none at all, you need to report the amount on your taxes and it’s treated as RRSP income. Note that the money must be in your RRSP savings for at least 90 days before removal from the Home Buyers’ Plan.

Closing costs

When purchasing a home, it’s easy to forget about one major expense: the closing costs. A land transfer tax must be paid for any property, but the amount varies by province and region. A home in Toronto could have a larger fee than a house with the exact same price in a different region. Although the Home Buyers’ Plan cannot be used to assist with this fee, you might be eligible for a First-Time Home Buyers’ Tax Credit. Other expenses can include costs for a lawyer, title search, property tax adjustment, and repairs.

What about the First Home Savings Account (FHSA)?

This is another great option for saving as a first-time home buyer. This plan has some similarities to an RRSP, with some key differences, including a different contribution limit. Is an FHSA right for you?

Getting started with budgeting for your first home

Purchasing a home is likely one of the biggest financial decisions of your life and it all starts with a down payment. Because this cost can soar into the tens of thousands and beyond, many are taking advantage of the money from their RRSP savings. First-time owners can use the Home Buyers’ Plan to withdraw a set amount of their savings without paying tax, as long as they follow the program rules for repayment and other details. Though there are other costs associated with buying property, having a little help with the down payment can go a long way.