Programs Available To First Time Buyers

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Insured Mortgages

There are a number of programs available to first time homebuyers that enable them to access mortgage financing with as little as 5% down payment or in some instances, with No Money Down. Both these programs are made available through offering lenders mortgage insurance. Mortgage insurance protects the lender against payment default by the homebuyer. Most lenders require it where the homebuyer has less than 25 percent of the purchase price as a down payment These programs give people incentive to purchase by creating an opportunity to own their own home without having to accumulate a large down payment. Another mortgage program is the Cash Back mortgage which gives the borrower(s) a percentage of the mortgage back in cash to apply towards the costs associated with the closing of their property. There are special terms and conditions attached to many of these programs including mortgage insurance fees. For more information about these programs and fees, contact one of our mortgage consultants.

What is the Home Buyer's Plan?

The Home Buyer's Plan (HBP) is a federally instituted government program that allows you to withdraw up to $25,000 from RRSPs to buy or build a ‘qualifying home’ (as a first time home buyer) or for someone who is related to you and is disabled. You may still be able to be considered a first time home buyer if you own a rental property or you have not recently owned a home. Only the individual who is entitled to receive payments from the RRSP can withdraw funds from an RRSP. The only restriction is for locked-in RRSPs that you are un-able to withdraw funds from.

You do not have to include eligible withdrawals in your income, and your RRSP issuer will not withhold tax on these amounts. You can withdraw a single amount or make a series of withdrawals throughout the same year, provided the total of your withdrawals is not more than $25,000. If you buy the qualifying home together with your spouse or common-law partner, or other individuals, each of you can withdraw up to $25,000.

You have to repay all withdrawals to your RRSPs within a period of no more than 15 years. Generally, you will have to repay an amount to your RRSPs each year until you have repaid the entire amount you withdrew. If you do not repay the amount due for a year, it will be included in your income for that year.

Qualifying Home - For the purposes of the Home Buyer's Plan, a qualifying home is a housing unit located in Canada. This includes existing homes and those being constructed. Single-family homes, semi-detached homes, townhouses, mobile homes, condominium units, and apartments in duplexes, triplexes, fourplexes, or apartment buildings, all qualify. A share in a co-operative housing corporation that entitles you to possess, and gives you an equity interest in, a housing unit located in Canada also qualifies. However, a share that only provides you with a right to tenancy in the housing unit does not qualify.

Locked-in RRSPs - In most cases, you will not be able to withdraw funds from a locked-in RRSP. Locked-in refers to the restrictions and limitations that are imposed by the Pension Benefit Act for each province and territory. The locked-in RRSP is designed to preserve pension assets for your retirement. Money put into your locked-in RRSP usually is the transfer value of pension benefits you have built up in your former employer's pension plan, which you asked to be moved when you terminate employment or plan membership. If you are unsure if your RRSPs are locked in, contact your issuer.

Benefits

The utilization of your RRSP's within the guidelines of the HBP results in benefits that are quantifiable immediately and extend over the long-term:

• Increased down payment
• Decreased principal owing
• Avoidance of substantial interest costs that accrue over long periods

Establishing an RRSP with borrowed funds

The "HBP" permits an individual to establish an RRSP with borrowed funds, and then use the resultant tax refund for a down payment. After a 90-day period, the RRSP is collapsed to repay the loan. You will then receive a tax refund that can be applied to the purchase of a home. These funds are considered an acceptable form of payment provide that the refund is received at the time of closing and the lender can verify that the borrower has proven liquidable assets equal to a minimum equity of 5% of the purchase price. The client must supply their most recent Notice of Assessment and their last pay stub for the previous year showing year-to-date earnings and taxes paid.

Managing Tax Refunds

The government does not monitor the funds that are withdrawn from RRSP's for the purposes of the HBP. Therefore, providing that an individual has qualified as a buyer and has purchased a qualifying home, they may do whatever they desire with the money. Furthermore, the income tax refund received may be used in whatever manner decided, such as:

• Clearing the balance on credit cards
• Reducing, or retiring, personal loans
• Making lump sum payments on a mortgage
• Purchasing household necessities — appliances, furniture, accessories etc.
• Increasing the down payment to reduce/avoid default insurance premiums
• Paying for legal fees and or tax adjustments

The more debt you are able to pay off, the less in monthly expense obligations you will have. This will ultimately put you in a much better financial position.

What else should you know?

The Home Buyers' Plan enables you to borrow money to top up your RRSP plan using accumulated RRSP eligibility limits. If your tax assessment notice indicates you are eligible for $18,000 in contributions in the current year, and you already have $4,000 in a self-directed plan, you are allowed to borrow — subject to credit approval — the $16,000 to buy the RRSP required to bring you up to the $25,000 Home Buyers' Plan limit.

Then you can claim the eligible deduction against your current year's income in order to get a large tax rebate. You can use the rebate to pay down the loan or apply it to the cost of buying the home. Here, of course, the amount of tax you're paying each year is an important factor. If the $16,000 deduction in this example results in a $5,000 tax rebate, it can be used as you see fit. If, on the other hand two partners each earning $80,000 per year takes their maximum RRSP of $25,000 each in the current year, they could net a total of $15,000 or more in a tax rebate.

You are then allowed to withdraw up to the $25,000 maximum from the RRSP 90 days after topping up or creating the plan, subject to the re-deposit requirements described above.

NOTE: If you're planning to borrow the money for the maximum RRSP, you could end up disqualifying yourself for a mortgage because your monthly payments will be too high. Your "total debt servicing ratio" — the proportion of your gross income required to service both the home related costs and other monthly obligations — may exceed the usually acceptable monthly maximum of 42%. Another $600 per month could well make the difference in whether or not you'll qualify for a mortgage.

For more information please visit the Revenue Canada website.