Using RSP's for your Down Payment
The Registered Retirement Saving Plan (RRSP or RSP in short) is a favorable investment option that can be utilized as down payment for your home purchase. The federal government’s Home Buyer’s Plan entitles each person to withdraw a maximum $20,000 from his RSP. If the spouse or partner is also eligible for the RSP, together it makes $40,000 for one house, and so is a significant contribution towards the down payment.
As per the 1997 tax law amendments, those who withdraw from the RSP are not charged any penalty if they utilize the money for first home purchase and they repay the amount in 15 years by the yearly contribution or installments.
If you own more than one RSP, you can make withdrawals from all. However, the combined amount that can be withdrawn should not exceed the $20,000, the maximum limit per individual. You cannot withdraw the amount from the locked-in RSPs.
In order to qualify for the Home Buyer’s Plan, you have to prove that you are a first-time homebuyer. However, the plan entitles those who own a rental property also but on condition that they did not buy the property during the last five-year period prior to applying for the Home Buyer’s Plan.
The following are the important guidelines that have to be met before applying for the Home Buyer’s Plan:
The RSP funds should be at least 90 days old prior to the withdrawal.
The RSP funds cannot be utilized for any investment purpose including buying a rental property.
After withdrawing from the RSP, you must utilize the fund before October 1st of the following year. For example, if you withdrew fund from RSP in April 2007, you must build or buy your house before October 1, 2008. The home is considered as ‘built’ only when it becomes habitable.
The RSP can be utilized only if you produce a signed agreement such as the purchase contract from the builder or seller showing your purpose of purchasing the property. It should also clearly indicate that you are buying the home for the first time, and it is your principal residence.
You are not eligible to withdraw from your RSP if you or your partner owns the property 30 days before the date of withdrawal.
The RSP fund is not transferable. However, if a person intends to buy a property for his close relative who is disabled, he can utilize the money for the latter’s home purchase provided that he produces all necessary documents to show his relationship with the buyer and also his disabled status.
There are special RSPs available for the disabled people. By participating in this scheme, they can avail a lot of benefits including a cheaper home.
The total tenure of the RSP loan is 15 years. It means that you have to repay at least 1/15th of the funds every year. If you fail to refund the minimum amount every year, the outstanding amount for that year will be considered as your additional income, and you will be taxed for it.
You have a maximum two years’ period to start repaying your RSP funds. However, it is a good idea to start repaying it as soon as possible to avoid the delay in paying it off. You can withdraw your RSP a second time, if you meet the necessary criteria again, after repaying the complete RSP fund that you had withdrawn.
Most of the people find RSP as a good source for down payment. The RSP fund can be combined with the borrowed funds, and you can get a significant tax deduction. However, before applying for it, you need to think over its pros and cons. Compare the benefits of utilizing your RSP, which itself is an investment for you, with the mortgage costs. Are you eligible to get a mortgage deal that costs you less than the earning potential from your RSP? If so, you can undoubtedly choose the earlier one, and leave your RSP for your future. Also, you need to consider your capacity to repay the RSP fund annually. If you fail to do so, you will be penalized for it.
It is better to approach a financial advisor to get proper guidance in these matters. However, as a general rule, RSP is a reliable source that can be utilized for your first home purchase.