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Originally posted by Aashu

We got pre approval done before but being first time buyer they would only preapprove for fixed rate and not variable. So although we had pre approval, we do not gain from it. They said when we actually get mortgage, they would let us know how much variable they can offer but during a pre approval their policy is to offer only fixed rate. Does this sound right ?

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Apart from locking the fixed rates, we do lock the 'discount off prime' for variable rate mortgage though not locking in the 'actual rate' payable at the time the mortgage starts.

Hence, if we get a pre approval for some client to get him prime -0.75% (or whatever the prevailing discount or premium may be) and lock this for 120 days, then the client would have his mortgage for the whole term at prime -0.75% if the deal closes in time.

However, you also have a good rate in prime -0.50% and you can enjoy this rate for 5 years.

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Originally posted by investpro

Hi Aashu,
Pre-approvals are usually given on fixed rate basis but you are not bound to take that rate. You can take the most advantageous rate at the time you finalise your home deal.

Are you planning to pay 20% down on your home? If you are you can get rate of prime.
Also if you have room in your RRSP deduction limit as per your NOA( notice of assessments), you can utilise that to get money from the govt to use for the down payment or for your closing costs or for renovation or to pay down your debts etc. Very good maneuvre. I do it very often for my clients.
Something a bank doesn't tend to offer.

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I understand I am not boud to take that rate but what I am trying to say is they did not approve us for variable rate so now when variable rate has gone up, we can not avail lower variable rates that were available when we got pre approval done.

Secondly, any contribution in RRSP has to be in RRSP for atleast 30 days before you can withdraw it. When you say get frm governemnt, how is that ?

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Originally posted by Aashu

Quote:

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Originally posted by investpro

Hi Aashu,
Pre-approvals are usually given on fixed rate basis but you are not bound to take that rate. You can take the most advantageous rate at the time you finalise your home deal.

Are you planning to pay 20% down on your home? If you are you can get rate of prime.
Also if you have room in your RRSP deduction limit as per your NOA( notice of assessments), you can utilise that to get money from the govt to use for the down payment or for your closing costs or for renovation or to pay down your debts etc. Very good manoeuvre. I do it very often for my clients.
Something a bank doesn't tend to offer.

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I understand I am not bound to take that rate but what I am trying to say is they did not approve us for variable rate so now when variable rate has gone up, we can not avail lower variable rates that were available when we got pre approval done.

Secondly, any contribution in RRSP has to be in RRSP for at least 30 days before you can withdraw it. When you say get from government, how is that ?

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For first time home buyers, the home buyer plan allows withdrawal from RRSP with out withholding tax. However, the money has to have remained in RRSP for 89 days and not 30 days.

You do have to put back this money back in your RRSP in 15 years after 2nd year of possession of your house.

You can read about the home buyer plan here:

web link : http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

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Originally posted by Aashu

Sorry, I meant 90 days but what is this borrowing frm government ?

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Hi Aashu,

I can see where my hurried statement could have been construed to mean that one can borrow from the government , but that is not what I meant.
I will attempt to explain this strategy as best I can.

Let us assume a couple wishes to buy a home and each has only $5,000 in RRSPs, i.e spouse 1 (S1) has $5,000 and spouse 2 (S2) has $5,000.


SI has RRSP deduction limit of $25,000 as per his NOA
S2 has RRSP deduction limit of $25000 as per her NOA
( I am here taking the traditional view of a married couple- husband and wife)

SI can contribute upto $15,000 into his RRSP to make it $20,000, leave it there for $90 days and withdraw it to help make the down payment.

Ditto with S2

So the couple can have upto $40,000 together (max amount allowed by gov rules)to utilize against the down payment.This amount is a tax free loan and incurs no tax upon withdrawal from the RRSP. However this amount has to be paid back in 15 years starting the 2nd year from the year of withdrawal

The $5000 each has contributed beforehand, each probably has collected the tax returns. However the extra $15,000 each has contributed now will be eligible for a tax return next year. If each is in the 31.15% tax bracket that means a total return of $30,000 * 31.15% = $9, 345
which probably more than covers the closing costs. However keep in mind the closing costs have to be paid now and not next year.

If the couple does not have the $15,000 each to put into an RRSP ( as is usually the case) there is a possibility of borrowing it from a financial institution and investing the borrowed funds in money market or a 90 day GIC or an open GIC. The interest on the loan will be higher than the return but it's only for 3 months.

When a couple takes a loan each there are other ramifications, such as being able to make the monthly loan payments over and above the mortgage payment and then again after 2 years add the return of RRSP amount (which must be taken into account anyways, whether the couple takes the loan or not). The $9,345 the couple gets as a refund can be utilized to partly pay down the loans as well.

There are several things one can do with the loans the couple takes (I keep saying loans because these are RRSP loans and each person has to take a separate loan- a joint loan is not allowed for RRSP) if one goes that route.
1. Upon withdrawal of the funds- pay off the loans immediately with the funds withdrawn. That way one doesn't have to worry about the monthly payments on the loans over and above the mortgage and return of RRSP amount (starting after 2 years for the next 15 years)
2. If you have higher interest debt such as credit cards- you can pay those off as well using the money withdrawn from the RRSP loan. The interest on an RRSP loan is usually cheaper than a credit card, box store card and in several cases even an LOC (line of credit).
3. Help with down payment- already outlined above and also closing costs.

In all cases the couple has to repay the RRSP amount withdrawn be it tied to loans or not

Please note that this is a general picture. You have to go to your financial planner/mortgage broker to analyze your situation to see if it makes sense. In my practice, in majority of cases it makes sense because you will get the tax refund from the taxman which o/w you won't get. That is an extra bonus- whatever you use the funds for. Even if you pay down the RRSP loan- you still get $9,345 extra upfront in the above example which is always good.

Usually I recommend the first route- pay off the RRSP loan immediately so the couple isn't burdened with the monthly payments of those as well as the mortgage payments, provided they don't have too much other high-interest debts.

Once again, please consult with a financial planner.

Also please feel free to ask any questions to clarify/understand the above. Will be glad to help in any way possible. 'Tis my passion.

Good luck with the home.