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Personal Investor: How to use your RRSP to buy a home

ANALYSIS: It’s the ultimate conundrum for first time home buyers: risk buying at the height of the housing market or risk having the price of a house skyrocket beyond affordability.

For many first time home buyers the problem is compounded by having to scrimp and save for the minimum five percent down payment. The longer it takes, the more that five percent down payment grows.

But there is a way to raise a down payment by borrowing from your registered retirement savings plan (RRSP). Through the Home Buyer’s Plan the Federal government allows first time home buyers to borrow as much as $25,000 from their RRSPs. The loan is tax free provided it is paid back within 15 years. Payments must begin within two years from withdrawal and at least 1/15 of the funds must be returned to the RRSP each year.

Here are other key terms:

· Plan holders and their spouses can each withdraw up to $25,000 from their individual RRSP to put towards a down payment on a home

· The RRSP funds must be on deposit at least 90 days before they are withdrawn

· A signed agreement to buy or build a qualifying home is required

First time home buyers might be reluctant to dip into their hard earned savings because the funds will no longer be able to grow in the RRSP, but deploying the cash in a home could bring bigger benefits.

For starters, any amount included in a down payment for a home becomes equity in that home. If it appreciates in value, which most houses do over the long term, it becomes an investment.

Also, the money included in a down payment will make the mortgage amount that much smaller. Every dollar toward the house becomes one less dollar that attracts interest. Think of it as a risk-free investment that grows equal to the mortgage rate. Mortgage rates are low right now but that won’t last forever.

Finally, bigger down payments lead to lower mortgage insurance premiums. Mortgage insurance is mandatory for down payments of less than 20 percent of the purchase price of the home.

Premiums are tagged onto regular mortgage payments, and range from 1.8 percent to 3.6 percent of the mortgage amount. Premiums are highest for smaller down payments.

Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI

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