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26 Feb

What is an RRSP Loan and how can it help me with down payment?

General

Posted by: Gleb Tchani

I would like to present you with a brief overview on what is an RRSP loan and how it can help a first time buyer using Home Buyers’ Plan (HBP).  This article is not about how to incorporate RRSP into your retirement planning.

 What is an RRSP loan?

               RRSP loan is a loan that is given out for a sole purpose of contributing to an RRSP.  Putting those funds into an RRSP program is basically a requirement.  For that reason, these loans often come with a lower interest than regular personal loans.  For example, Manulife Bank currently offers Prime + 0.5% or 3.2% on the RRSP loan.

Where can I get an RRSP loan?

               The RRSP loans can be obtained through practically any financial institution.  I am able to assist with obtaining such loan through Manulife Bank.  Manulife Bank offers many benefits and flexibility.  Please contact me for more information.

How can RRSP loan help a first time home buyer?

               As you may know, Canadian Government allows First Time Home Buyers to withdraw as much as $25,000 per individual to assist with a purchase of their first property.  This program is usually referred to as Home Buyers’ Plan.  Here is a link to CRA webpage for reference.  The major requirements to qualify for this program are; to be a first time home buyer and, to have RRSP funds in the account for a minimum of 90 days prior to a withdrawal under the Home Buyers’ Plan.

               We are all aware that putting money into an RRSP triggers a tax refund.  For people with an income of between $45,000 and $90,000 the refund should be around 30% of the contribution amount.  Let me use a scenario to explain how it works:

John Doe has an annual income of $80,000, has $25,000 in savings but wants to have another $15,000 to bring his down payment to 10% on a $400,000 purchase.  If John borrows a $15,000 RRSP loan for a term of 2 years and a rate of 3.2%, his monthly payments will be $646.05.  If John simply makes his monthly payments for next two years, total amount of interest he would pay would be $505.10.  However, John will receive back a tax refund that would be approximately $5,000.  If John uses this amount to pay off a portion of his debt, the remaining balance will be $10,000 (Manulife Bank’s RRSP loan is an open loan and can be repaid at any time).  Now, John’s remaining repayment period is only a year and 4 months and total interest paid over that period would be $225.98.  Alternatively, John could simply use that extra $5,000 to help him with closing costs.  It takes a few days to process the loan and deposit into an RRSP account and the extra $15,000 can be used in 90 days.

When do I have to repay the amount used under the HBP?

               The repayment can be postponed for 2 years and then a minimum of 1/15th of the borrowed amount has to be re-paid each year for next 15 years.  Alternatively, the 1/15th can be simply added to that year’s income and you would just pay tax on it.  Since you are technically borrowing from your self, there is no interest on the amount used under Home Buyer’s Plan.

Some FAQs

  • – When you withdraw money from an RRSP using HBP, you get a cheque (or transfer into your account).  Often people are under the impression that the money has to go into down payment.  That is not true, the money can be used for anything, literally.
  • – The money can be withdrawn from RRSP using Home Buyer’s Plan between 30 days before and 30 days after the closing date.

Have any more questions?  Do not hesitate to contact me, I would be very happy to help.