Spring Home Buying: RRSP Mortgage and Home Buyers’ Plan

Q. Can I use my RRSP to finance either my mortgage or someone else’s mortgage (family or not)? I would therefore treat my RRSP as a mortgage lender and my RRSP would receive the principal and interest, allowing me to earn a market-based rate on my RRSP. – Philippe T.

A. Your self-directed RRSP can be used to invest in a non-arm’s length first mortgage held on a Canadian principal residence (i.e. your own home or that of someone related to you), provided you have sufficient assets in your RRSP to make the program cost-effective. If your mortgage qualifies under the rules, you can hold the mortgage in your RRSP and withdraw the off-setting funds. In this way, the mortgage is a fixed income asset in the RRSP. As the mortgage must be set up at prevailing rates, your RRSP may be able to earn a better rate of return than what is available from other fixed income investments. Despite these obvious advantages, there are other considerations to determine if this makes good financial sense. The mortgage interest rate and other terms must reflect normal commercial practices, adding to the overall cost. There are fees for set-up, appraisal and legal services, plus ongoing annual administration fees to consider. To determine if this is a good strategy, compare the rate of return on the mortgage, additional costs, and the rate of return on alternative investments.

Q. My husband and I want to buy a condo this spring and we’re trying to stretch our dollars to buy the home of our dreams. How can we maximize our down-payment? – Sally A.

A. If you and your spouse are first time homebuyers, the Federal government allows you each to withdraw up to $20,000 from your RRSP under the Home Buyers’ Plan. No tax is withheld on the withdrawal, however, the funds must be repaid in annual minimum amounts over the next 15 years beginning in the second year of your home ownership. Also, the Home Buyers’ Plan only applies to a principal residence located in Canada and you cannot have owned a home, or lived in a home owned by your spouse, in any of the five years prior to the time of withdrawal of funds. In addition to repaying the money over the next 15 years, the money is due within 60 days of each year end and, if repayment is not made, the amount is added to your annual income and becomes taxable. In the fall of each year, CRA will send you an annual repayment statement called ‘Statement of Account—Home Buyers’ Plan,’ that will indicate the amounts repaid, the balance remaining, and the repayment required for the next year.

Bev Moir is a financial planner with The Moir Team at ScotiaMcLeod in Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member CIPF.

This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.