If you have never purchased a home before, you are all too well aware of how difficult it can be to qualify for a mortgage and manage those often ghastly monthly payments.
Even more difficult is saving money for that 5% or 10% down payment unless you're lucky enough to deal with the Bank of Mom and Dad.
The easiest way if you need to squirrel away a few dollars from each pay cheque is to use a Retirement Savings Plan (RSP) as a vehicle to fund your down payment. It's what they call a fund with benefits and not just when you turn 65.
If you weren't aware that you can take money out of your RSP with no tax penalties, chances are you are between the ages of 18 and 33. TD Canada Trust recently conducted a survey of this demographic, also known as the Millennial Generation, and discovered that at least half of the people in this age category didn't know much about RSPs.
What they're missing out on is the ability to withdraw $25,000 from an RSP to use as a down payment on a home if they are a first-time home buyer. That means a couple can take out $50,000 on their individual funds and there is no tax penalty at all.
Is there fine print on this amazing financial program? Well, yes.
The money you take out from an RSP to purchase a home has to be paid back into the fund. But the good news is, you have 15 years in which to do it.
Out of those 18 to 33 year olds who participated in the TD Canada Trust survey, 40% of respondents who stated they're not saving anything, even for retirement, claim they can't afford to because there are too many demands on their pay cheques or they have other priorities.
The benefit of choosing an RSP as a method of saving money for a house, apart from tax benefits, is that they yield higher interest rates than a typical bank savings account.
TD Canada Trust pollsters warn that Millennials considering an important investment decision such as this should discuss their plans with a financial advisor, particularly since there are so many misconceptions in this demographic.
Potential Drawbacks of Using an RSP For Your Down Payment
If you want to utilize your retirement savings plan for a down payment on a home, there are a few potential drawbacks to consider before you move forward. Otherwise, you could end up in a bad financial decision, resulting in a loss of all your hard work in buying a new home.
When you acquire your down payment using an RSP, you must fulfill the repayment terms, starting in the second year after buying your home. You must pay 1/15 of the total withdrawal amount or report the missed repayment as income on your tax forms. Therefore, having to make the repayment is a definite drawback if you cannot guarantee you will have the means to do so across the next 15 years.
With down payment funds openly available, there is a risk of taking on more debt than you can handle. When using an RSP for your down payment, make sure that you can easily handle the mortgage, RSP repayment plan and all other expenses to protect your current and future finances. Even with that approach, your financial health will likely suffer due to the setbacks you will incur from removing funds from your retirement account prematurely.
When you remove funds from your retirement savings plan, it eliminates the financial growth you would have experienced with those funds in the account the entire time. Your retirement account totals will not likely reach the value it would have otherwise, unless you can make up for the discrepancy with increased contributions.
Although there are disadvantages to consider, you may well find it worth it to pursue this route anyway to achieve your dreams of becoming a homeowner. Weighing the pros and cons will give you the best outlook on your ability to make the most of this program.
More Fine Print
The Canadian government calls this method of using RSPs the Home Buyer's Plan. In order to use an equity built up in an RSP, you must have had the funds in that RSP for a minimum of 90 days and you have to show the institution holding your RSP a signed agreement as proof you are purchasing or building a home that qualifies under the plan.
You do indeed have 15 years to put that money back in your RSP, and every year you must put at minimum one-fifteenth of the amount you took out. So, if you withdrew the maximum $25,000 from your RSP, every year at the very least $1,667 must go back into it. A financial advisor may strongly recommend that an automatic contribution be taken from your bank account for direct deposit into your fund. Otherwise, if you're caught short, there will be tax implications.