Recently, I’ve been getting a lot of questions about first-time home buyers swapping funds between RRSP and FHSA accounts because some bank advisers have been touting it as a clever strategy to boost down payments. But is it clever, or a lot of needless work with additional downsides? (Spoiler. For many people, this is the equivalent of taking 3 left turns instead of one right turn to get to the same destination. But there are some cases where it may make sense.)

So, let’s talk about what these advisers have allegedly been advising home buyers, understand the motives as to why they might be encouraging that, and finally briefly touch on why someone may or may not want to consider this kind of strategy.

What is the RRSP to FHSA Down Payment Swap? And why might a bank adviser suggest it?

While I’ve never had a bank adviser advocate directly to me for the RRSP to FSHA Down Payment Swap, the home buyers that have been pitched this seem to think it’s a way of getting around gaps in their down payment.

As the logic goes, borrow an RRSP loan from the bank… Contribute that loaned capital into your RRSP…Transfer the money from the RRSP to the FHSA… Withdraw the money as your down payment once you purchase a home.

All of this you can most certainly do. The most obvious question when you hear this though is “Why do all this in the first place?”. It’s a good question.

This kind of work around likely exists because a majority of banks have a couple challenges that compound when buyers have gaps in their down payments. 

The first problem is that most big banks don’t allow for borrowed down payments. (In fact, the banks appear to be so vocal on this that many realtors we talk to don’t even know borrowed down payments are still a real thing.) So while the banks can’t use a borrowed down payment, what they can use is funds from your RRSP or FHSA.

The second problem (in this case), is that most banks don’t actively have an FHSA loan program (meaning a loan for the sole purpose of investing into your FHSA). What they do have instead is an RRSP loan.

So for a bank that has internal limitations around borrowed down payments AND no formal FHSA loan program, borrowing using an RRSP loan only to transfer it to the FHSA is a creative solution around that. But it’s a creative solution born out of that specific lenders limitations. The easier solution is to just go to mortgage lenders that don’t have those limitations in the first place.

A cautionary note.

To keep these articles short and to a specific point I often have to decide what I include and exclude from any given piece of writing. Here’s some additional thoughts in bullet point form for brevity.

  • Borrowed down payments have, in some cases, significant drawbacks including lowered pre-qualifications, increased default insurance premiums (CMHC) and higher mortgage rates. This isn’t advocating for borrowed down payments (although some time’s there’s a case for it), it’s just saying that there’s a better way to do it then whatever funky mumbo-jumbo some of these bank advisers seem to be pitching lately.

  • Swapping from your RRSPs to your FHSAs might be a great idea when you already have a large balance in your RRSPs and no additional ways of contributing to your FHSA. The RRSP expects you to recontribute back to the RRSP the money you took for your downpayment, whereas the FHSA does not.

  • You do NOT get additional FHSA contribution room by performing this RRSP to FHSA swap, in fact, what you’re actually doing is lowering your total eligible RRSP contribution room because you don’t get that back when you make the transfer. AND if you’re not careful could get hit with some additional fees/taxes if you accidentally over-contribute.