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Using an RRSP Loan in Canada for a Down Payment on a Home

January 8, 2025 | Posted by: Nicholas Pratile

Purchasing a home is a significant milestone, and for many Canadians, saving for a down payment is one of the biggest challenges. Did you know you can use an RRSP loan to help fund your down payment? By combining an RRSP loan with the Home Buyers' Plan (HBP), you can strategically maximize your savings and take a big step closer to homeownership. Here’s how it works.

What Is the Home Buyers' Plan (HBP)?

The Home Buyers' Plan (HBP) allows first-time home buyers in Canada to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) tax-free to put toward the purchase of a home. If you’re purchasing with a partner, you can combine your withdrawals, accessing up to $70,000 in total.

Funds withdrawn through the HBP must be repaid to your RRSP over 15 years, starting two years after the withdrawal. This makes it a flexible and attractive option for many first-time buyers.

Steps to Use an RRSP Loan for Your Down Payment

  1. Apply for an RRSP Loan If you don’t already have significant savings in your RRSP, you can take out an RRSP loan from a financial institution. These loans are specifically designed to help you maximize your unused RRSP contribution room.
  2. Contribute the Loan Amount to Your RRSP Deposit the borrowed funds into your RRSP. This step not only increases your RRSP balance but also makes you eligible for a tax deduction on the contribution.
  3. Claim Your Tax Refund When you contribute to your RRSP, you can claim the contribution as a deduction on your income taxes. Depending on your income level, this could result in a substantial tax refund.
    For example, if your marginal tax rate is 30% and you contribute $20,000 to your RRSP, you could receive a $6,000 tax refund.
  4. Withdraw Funds Under the HBP After your contribution has been in the RRSP for at least 90 days, you can withdraw up to $35,000 tax-free under the HBP to use toward your home’s down payment.
  5. Repay the RRSP Loan Use your tax refund or other savings to repay all or part of the RRSP loan. This reduces your debt and strengthens your financial position as you prepare for homeownership.

Benefits of This Strategy

  • Maximize RRSP Contributions: An RRSP loan allows you to take full advantage of unused RRSP contribution room, even if you don’t currently have savings.
  • Tax Savings: The RRSP contribution generates a tax refund, which can further supplement your down payment or help repay the loan.
  • Boost Your Down Payment: By accessing your RRSP funds tax-free under the HBP, you can meet or exceed the minimum down payment required for a mortgage.

Important Considerations

  • 90-Day Rule: Contributions must remain in the RRSP for at least 90 days before withdrawal under the HBP to qualify as tax-free.
  • Loan Interest: While the RRSP loan itself isn’t tax-deductible, interest charges will apply. Ensure you’re comfortable with the repayment terms.
  • HBP Repayment Obligation: You’ll need to repay 1/15th of the amount withdrawn each year, starting two years after the withdrawal. If you miss a repayment, the amount will be added to your taxable income for that year.
  • Income Levels: Your ability to contribute to your RRSP depends on your taxable income and available contribution room.

Example Scenario

Let’s say Sarah wants to buy her first home but doesn’t have enough saved for a down payment. Here’s how she uses an RRSP loan:

  1. She takes out a $20,000 RRSP loan and deposits it into her RRSP.
  2. Her marginal tax rate is 30%, so she receives a $6,000 tax refund after claiming the contribution.
  3. After 90 days, Sarah withdraws $20,000 under the HBP.
  4. She uses the $6,000 refund to repay a portion of the RRSP loan and applies the $20,000 HBP withdrawal to her down payment.

This strategy enables Sarah to afford her home sooner while also leveraging tax benefits.

Is This Strategy Right for You?

Using an RRSP loan for a down payment can be a powerful tool, but it’s not for everyone. Consider your financial situation, ability to manage loan repayments, and plans for repaying the HBP withdrawal. It’s always a good idea to consult with a mortgage professional or financial advisor to determine if this approach aligns with your goals.

At Mortgages with Nicholas, we’re here to help you explore all your options for buying your first home. Whether it’s understanding how to use an RRSP loan or finding the right mortgage solution, we’ve got you covered.

Contact Mortgages with Nicholas to explore strategies tailored to your needs.

Let’s make your homeownership dreams a reality!

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