Home Buyer’s Plan, mortgages, new home savings plan
Every first-time home buyer is faced with the challenge of financing their purchase. This comes with two elements: the down payment; and the mortgage.
How can you scrape together a down payment?
Saving like crazy is what most young families do to raise a down payment. You may be able to come up with the 20% down payment required to purchase a home of $1 million or more. If your prospective home is priced between $500,000 and $999,999, you’ll need 5% of the first $500,000 of the purchase price, and 10% for remainder, and if you are unable to get to that 20% down payment in this price range, you’ll need to purchase mortgage loan insurance.
Gifts or loans from parents are often also a source of funds. But RRSPs can also be another source of ready cash for a down payment, through a government program called the Home Buyer’s Plan (HBP).
The HBP allows first-time home buyers withdraw up to $35,000 from their RRSPs in a calendar year to buy or build a qualifying home. That amount will not be included in your income and tax will not be withheld on the withdrawal. So for a couple, each with at least $35,000 in their separate RRSPs, that could mean an extra $70,000 to tack on to a down payment.
What are the rules for HBPs?
Basically, you have to follow a few key rules in order to qualify for withdrawing money from your RRSP under the HBP:
- You have to be a Canadian resident and have entered into a written agreement to buy or build a qualifying home – that is, just about any type of housing unit located in Canada.
- You have to use the home as your principal residence within a year of buying or building it.
- You have to be a first-time home buyer. Generally, if you or your spouse or partner owned a principal residence within four years before your HBP withdrawal, you won’t qualify.
- You have to repay the amounts you’ve withdrawn back into your RRSP over a maximum 15-year period, with a minimum annual repayment of 1/15 of the total withdrawal. You may, of course, pay back more and faster.
The downside of the Home Buyer’s Plan is that you’re taking money out of your RRSP, so it will no longer be growing and compounding within the plan on a tax-sheltered basis. However, the offset is that you’re using to purchase residential real estate, which in Canada has historically been a good investment, at least keeping pace with the rate of inflation, and often exceeding it by a wide margin.
To make an RRSP withdrawal under the HBP, you have to complete and file CRA Form T1036-12e. Everyone’s situation is different in the specifics, and the Home Buyer’s Plan can be complicated. So getting some objective advice from a qualified financial planner is a good idea.
In general, an HBP is a good source of cash for a down payment on a first home. You’re essentially borrowing from yourself. But you need to consider it carefully in the context of your personal situation. There are many factors to take into account: the size of your RRSP, the type of home you’re considering, your financial resources, including your employment prospects, your family plans (for example, is a baby on the way?), your ability to repay, and so on.
Shopping for mortgages
The down payment is the first step in financing your home purchase.
The mortgage market is ultra-competitive, so don’t be afraid to bargain. Most prospective lenders will match a lower rate if you are a good risk. Variable rate mortgages, which typically have posted rates 30 to 50 basis points lower than fixed-rate mortgages can appear to be a good deal for cash flow, but be sure your monthly budget can withstand higher payments if there’s a sudden rate increase.
Be sure to cut your amortization to the lowest period you can in keeping with your monthly cash flow budget. And keep reducing amortization at the end of every term while maintaining or increasing your monthly payment.
Also, be sure to use prepayment privileges – the ability to pay off a specified lump sum of your principal amount without penalty every year – to reduce your principal and thus your total interest.
First-time home buyers who acquire a qualifying home can also claim a non-refundable tax credit of up to $1,500. For 2022 and subsequent tax years, the value of the HBTC is calculated by multiplying $10,000 by the lowest personal income tax rate (15% in 2022).
A new registered savings plan
In 2022 the federal government announced details of a proposed new First Home Savings Account (FHSA). Expected to be available in 2023, FHSAs will be available to Canadians residents, who are 18 years old or older and have not owned a home in the year the account is opened or the preceding four calendar years.
The annual tax-deductible contribution limit will be $8,000 up to a lifetime maximum of $40,000. Unlike RRSPs and TFSAs, unused contribution room cannot be carried forward. The plan must be closed after 15 years.
The main benefit of the FHSA is that funds withdrawn to make a qualifying home purchase are not subject to tax. Any funds not used towards a home purchase can be transferred to an RRSP or RRIF without penalty or tax deferred, and without affecting contribution room on existing plans. Withdrawals for other purposes will be taxable.