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1 Mar

Using an RRSP loan for a down payment

General

Posted by: Michael Atkinson

I’ve read a few articles recently that talk about RRSP loans and potentially using the tax refund towards a down payment on a home. From the sounds of it, this seems like a great idea! You get to contribute to your RRSP’s, pay less tax, get a big refund, and then have money to put towards a down payment on a home. However in some cases, this may not be ideal. Getting a sizable loan with a monthly payment may hinder your ability to qualify for a mortgage.

Let’s look at some numbers to further explain.

Let’s speculate here and say you have $30,000 of RRSP room to contribute. You get a loan for $30,000, at Prime + 2%, amortized over 10 years. This works out to a monthly payment of $316.00. You are in a 30% tax bracket, so when you file your taxes you get $9,000 back on your tax refund.  You also have an additional $6,000 saved up on your own for a down payment.

In total with the tax refund, you have $15,000 to put down. Since the minimum down payment you can put is 5%, that limits us to a home worth $300,000. To qualify for a home worth $300,000, given the fact that you now have a monthly RRSP loan payment of $316.00 (whereas previously you didn’t have any debt), you will need to make $51,000 annually.

If you didn’t have that loan payment and could save up the $15,000 on your own, or get it gifted from a family member, you would only need to make $42,000 a year to qualify for a $300,000 home.

If you’re a first time home buyer, you can use up to $25,000 of your RRSP money towards a down payment as well, but you have to repay it over the next 15 years and it has to be locked into the RRSP for 90 days prior to withdrawal.

In the end, it depends on your situation to determine if this would be a good idea or not. If your income is high enough to qualify for both loans and are willing to take on an additional monthly payment, than this could be a perfect fit for you. If you’d rather save up the full down payment on your own to avoid that additional monthly payment, then you may want to steer clear of this method altogether.

I suggest speaking to your Mortgage Broker to discuss these options to see if it would be a good fit.

If you have any questions please feel free to give me a call at 778-554-4556.

Thanks for reading.