# Using RRSP homebuyers' program for downpayment



## Mike H. (Apr 15, 2009)

There is an interesting way for people with good incomes and unused RRSP contribution room to get a down payment, when they have no cash of their own. In effect, it's an interest free loan from the government. I'm assuming both husband and wife have marginal tax rates of 32% and unused RRSP contribution room of at least $25K each. This gives a best-case scenario; but the math can be done for other situations. 
Here's how it works:

1. Both husband and wife go to friendly bank for RRSP loans of $25K each, with the first payment deferred for 120 days. They invest the money in short term savings.

2. Both husband and wife file tax returns, and receive total refunds of $16,000. This is the money for the down payment.

3. After 90 days but before 120 days, husband and wife enter into a contract to buy or build a qualifying home. They withdraw the money from their RRSPs; and use it to repay the loans.

4. Starting in the second year after the year of withdrawal from RRSP, husband and wife each need to contribute $1,667 to an RRSP for 15 years, for which no tax deduction is given. If no repayment is made, this amount is added to income and tax is payable.

The real cost to this is the difference in interest earned while the money is in the RRSP and the interest accumulated on the loan. The best timing is to initiate this in December, January or February; for a spring home purchase.


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## Mike H. (Apr 15, 2009)

An interesting twist on this is for a couple in which one spouse is earning income and the other is not; nor is expected to in the future.

Normally, any withdrawals from spousal RRSPs are taxed back to the contributor spouse, up to the sum of spousal contributions made in the past three years. However, there is no such attribution with the RRSP home buyers plan.

In this case, the higher income spouse does the process described above for $25K in a spousal RRSP. Receives $8,000 tax refund to use toward home purchase. Lower income spouse withdraws funds under HBP to repay loan. Lower income spouse never makes required repayment to RRSP, and has the payment added to income; but pays no tax. Instead, higher income spouse makes RRSP contributions and gets tax deduction.

Does this make sense? If everything works correctly, what was effectively an $8,000 interest free loan becomes almost a gift.


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## Shayne (Apr 3, 2009)

It is a good strategy indeed. There are other twists to it as well depending on your a person's situation. 

If you amortized the RRSP loan over 10 years (banks will do this at Prime +1) You then give yourself $66K for down payment or other things. With the HBP you don't have to use your RRSP funds for the down payment, you can do what ever you want with it. Paying down high interest debt is obviously the best choice.

This can help if debt servicing is a problem for the home a person wants. 

I would only recommend it for people who know that there income will substantially rise in the next few years.


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