Chris Carter
Province
My brother and I are planning buying a home together. Are we eligible to use RRSP funds for the down payment? Would we be better off taking out a larger mortgage and leaving our RRSP funds invested?
– Jack, Pemberton
Dear Jack:
If you and your brother plan on making the new house your principal residence and have not owned a home in the past five years, you may qualify to take advantage of a home-buyer’s plan loan from your RRSP.
The plan allows individuals to borrow up to $20,000 from their RRSPs to use toward a down payment. You are required to repay the loan over the next 15 years, starting in the second calendar year after you make the withdrawal.
Assuming you and your brother have $20,000 or more in RRSP savings, you can both apply for $20,000 separately, providing you with a total of $40,000 toward a down payment.
The downside of tapping into your RRSP savings is that it can really impair the future value of your plan at retirement.
For example, let’s assume a 30-year-old investor withdraws $20,000 and repays it as required. Assuming an eight-per-cent rate of return, the $20,000 would have grown to about $400,000 by age 69.
A home-buyer’s withdrawal, together with the subsequent repayments, would result in a RRSP balance of about $230,000 or about $170,000 less than if the investor had left the funds untouched.
There are rules that can restrict withdrawals and your eligibility in some cases so check with the administrator of your RRSP to ensure that you qualify before making an offer on the property.
Send your questions to Chris Carter at [email protected].
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© The Vancouver Province 2005