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Create a downpayment


How Can You ‘Create’ A Down Payment?

Every year, just a few months before it's time to file your tax return, we tell buyers that this is the perfect time of year to "create" a down payment by using their RRSP allowable contribution limit and the Federal Government's Home Buyers' Plan for first time home buyers.

First a quick review... every first-time buyer has the right to withdraw up to $20,000 from his or her RRSP at the time of a home purchase. The little-known secret is that the money does NOT need to be used strictly for the down payment on your house or condo purchase. However, it does have to be in your RRSP for at least 90 days before pulling it out to purchase a home, so that's why you need to do some advance planning!

It also can be used to pay down other debts, pay closing costs, fund renovations, or even finance a vacation to the Bahamas (not recommended, but still possible).

So how can you create a down payment out of 'nothing'?

The first step is to dig out your last Tax Assessment form from Canada Customs and Revenue (you received this when you got your tax refund last spring) and check it to find out your allowable RRSP contribution as of right now. Many people have several thousand dollars left that they can contribute because they haven't topped up their contributions annually; some people have a lot more than that.

Let's assume for a moment that a couple is planning to purchase a home and each of them can top up their RRSP by at least $20,000.

The next step is to arrange for an RRSP loan of $20,000 each. Pretty well everyone can qualify for this loan because the banks keep your RRSP investment (a GIC, for instance) in their bank, so it's safe in their eyes. Take out this loan for a long term (three to 10 years), not because you're going to have this loan for a long time, but be- cause it will make your payments lower while you do have the loan.

When March 1st comes along, file your tax return right away and wait for the fat refund cheque to come in the mail.

Let's assume that you're in a 40 per cent tax bracket. You should then get back approximately $8,000 each in tax refund based on reducing your taxable income by $20,000. This $8,000 each (total of $16,000) now becomes your down payment... don't spend it!

Now here comes the fun part. Go out and purchase a home with a closing date of at least 90 days after you put your borrowed funds into your RRSP.

When you get to about 10 days to 2-weeks prior to the closing date for your home deal, instruct the bank to cash in your $20,000 worth of RRSPs each. The person at the bank, of course, will say... "You've got a loan against it" and then you will say "Pay the loan off with the $20,000 I'm withdrawing."

Following all of these steps carefully will leave you in the enviable position of having NO RRSP loan, $16K in your hand to use as your down payment and 15 years to repay the $40,000 that you withdrew from your RRSPs.

What if you're short of cash for your closing costs?

In addition, you could combine this down payment "creation" plan with a 'cash back' plan from a financial institution to help cover your closing costs. As an example, if you take out a mortgage with Scotiabank at the posted five-year rate, you get FOUR per cent of the mortgage principal amount as cash back in your hand on the day of closing. This is just one example of how our two decades in real estate and our past mortgage experience (we are both former mortgage brokers) can benefit you when you buy your home. We'll bet some of our own money that no bank will tell you about this "creating" a down payment plan! If you'd like to benefit even more from our years of experience, you might want to come in for a personal, one-on-one Buyer Consultation. Phil can look at your personal financial situation and offer you creative advice tailored to your personal circumstances. You can also email Phil with any questions that you might have!