No Down Payment, No Problem
By Calum Ross
As the average price point of real estate continues to increase in many of Canadas markets, I am surprised at how few first time real estate investors are using their Registered Retirement Savings Plan (RRSP). Frankly, I am amazed at the number of people in the real estate and mortgage industry that still do not understand the basics of how this program works and how it can benefit real estate buyers. For those of you who are unfamiliar with it, according to Canada Revenue Agency (CRA):
The Home Buyers’ Plan (HBP) is a program that allows you to withdraw funds from your registered retirement savings plans (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability. You can withdraw up to $25,000 in a calendar year.
Generally, you have to repay all withdrawals to your RRSPs within a period of no more than 15 years. You will have to repay an amount to your RRSPs each year until your HBP balance is zero. If you do not repay the amount due for a year, it will have to be included in your income for that year.
Now here is the piece that most people miss you get a tax refund for the contribution to the RRSP. What this means in simple terms is that the amount of money you place in your RRSP is given back to you at a percentage equal to your tax rate:
Simple Math: RRSP Contribution x Tax Rate Tax Refund
$25,000 40% = $10,000
Meaning, if you put $25,000 into your RRSP and you are at a 40% marginal tax rate, you would get a $10,000 refund so the actual cost to you is $15,000. After you have withdrawn this amount, you then have up to 15 years to repay it to your RRSP. You are required to start your repayments the second year following the year you made your withdrawals. It is important to keep in mind that you will not get a tax deduction for the HBP amounts that you repay to your RRSP. Normally you are required each year to repay an amount that is equal to 1/15 of the total amount you withdrew.
Now here is the piece that most aspiring real estate investors miss: according to CRA, Single-family homes, semi-detached homes, townhouses, mobile homes, condominium units, and apartments in duplexes, triplexes, fourplexes, or apartment buildings all qualify. In simpler terms, you can buy a home with a basement suite and live in the top and get yourself into the real estate investment market. You do have to live in the home but you dont necessarily need to stay there for the years that you repay your RRSP.
Even more good news – for those of you with unused RRSP contribution room, you can often even take an RRSP loan to get the $25,000 in your RRSP, and as long as you can afford the payments, you can keep this RRSP loan and the mortgage at the same time (be responsible with this idea as too much debt payment can cause a lot of grief for those who dont budget well). In very basic terms this plan can be legally used to buy a property, with no down payment, by doing the following:
Step 1: Get an RRSP loan and invest for 90 days
Step 2: Repay a portion of the RRSP loan with the tax return refund from CRA
Step 3: Withdraw the money under the Home Buyers Plan for a qualifying home
Step 4: Continue to pay monthly RRSP loan payment and mortgage payment and you are officially a real estate investor!
After you move into your home and start making payments back to your RRSP, you have to designate the portion that you would like to go towards your HBP repayment. Since your earnings normally increase as the years go by, it is important to try and pay back the amount you borrowed as quickly as possible. This gives you the potential to get a higher tax deduction for your RRSP contributions in your higher earning years, as well as allowing for more years of tax sheltered growth while the money is in your RRSP. If you dont repay the amount that year, 1/15 of the repayment will be added to your income.
Keep in mind that this is just a general overview of the program. It is important to examine in detail how the program would impact your situation. Please take the time to consult a financial professional so that you can learn the full details of the program before you move ahead. A more in-depth review of the program can be found by visiting CRAs website at: www.cra-arc.gc.ca
My first real estate investment was done with the Home Buyers Plan when I was 25 years old. That same piece of real estate that I borrowed $10,000 from my RRSP to buy was worth over $300,000 more than when I bought it, less than ten years later. Even if that return was all I got at age 65, forty years later, its a rate that would be tough to beat in any market!
This is also a great strategy for getting your kids starting in the real estate investing business. Consider loaning (in whichever way that works for you) your child the money to buy a home by contributing to their RRSP. They then withdraw the money 90 days later. Its also a great opportunity to teach them all about joint ventures!
Whichever route you choose, as the housing and mortgage market starts to get a little more chaotic, make sure you take the time to make your real estate investing and financing decisions wisely.
Calum Ross was ranked as the top producing mortgage broker in the country by Canadian Mortgage Professional Magazine. He holds both a B.Comm and MBA in Finance and recently completed a comprehensive Leadership Program at Harvard Business School. Reach him at: www.calumross.com.
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