Getting the Assistance You Need to Stop Renting and Purchase Your First Home
Buying your first home was once considered an important milestone for any adult. But in recent years, many millennials are dismissing the idea of buying due to limited financial resources and choosing to rent instead.
With housing markets across the country heating up rapidly, buying your first home can be a bit of a challenge. However, contrary to popular belief, renting may actually be more expensive in the long term. Plus, you’re getting no return on your investment.
Fortunately, there are several government incentive programs designed to help first-time buyers stop renting once and for all and finally break into the housing market. This article will explain what these incentives are, the pros and cons of each, as well as other important factors to consider before going ahead with the purchase of your first home.
Do I Qualify as a First-Time Homebuyer?
Although this probably goes without saying, you may only be considered a first-time homebuyer if you have never purchased a home before.
You must also not have occupied a home that you or your spouse owned in the last four years. This period begins on January 1 of the fourth year before the incentive is funded and ends 31 days before the date the incentive is funded. Common law partners are included in this condition.
If you have recently experienced the breakdown of a marriage or common-law partnership, you may be considered a first-time homebuyer even if you don’t meet the other first-time homebuyer requirements.
It’s important to keep in mind that the definition of a first-time home buyer can vary from one program to another, and some programs are not as strict with their eligibility criteria. Speak with your mortgage broker to determine if you are eligible.
What Programs Currently Exist for First-Time Homebuyers?
First Time Homebuyer Incentive
The First Time Homebuyer Incentive is a shared equity mortgage program that makes it easier for first-time homebuyers to purchase a home and lower their monthly mortgage payments.
The government will share in the upside and downside of the property value, allowing you to borrow 5 percent (if you are purchasing an existing home) or 10 percent of the purchase price of a brand-new home. You pay back the same percentage of the value of your home within a 25-year window, or when you sell it. This means that if the value of your home increases, the amount you have to repay will increase.
In order to qualify for this incentive, you and your spouse or common-law partner must be Canadian citizens, permanent residents, or otherwise authorized to work in Canada, as well as first-time homebuyers.
Your total annual qualifying income must not exceed $120,000 and your total borrowing must be no more than four times your qualifying income. You must also meet the minimum down payment requirements with traditional funds such as savings or an RRSP, or a non-repayable financial gift from an immediate family member or relative.
Land Transfer Rebate
Some provinces charge a land transfer tax of between 0.5 and 2 percent of the property’s purchase price when you buy a home. This represents the largest closing cost you’ll have to pay, so provinces including British Columbia, Ontario, and P.E.I. will rebate some (if not all) of this tax if you’re eligible. Homebuyers in Toronto are also eligible to receive a rebate on the city’s land transfer tax on top of the provincial rebate.
In Ontario, if you have never owned a home before, anywhere in the world, you will receive a $4,000 discount on the land transfer tax. If you are two first-time buyers, buying together, the discount still remains at a maximum of $4,000. If one applicant is a first-time home buyer and the other is not, then you can get a discount on the land transfer tax of $2,000. We suggest you speak to your real estate lawyer about these technicalities.
First-Time Home Buyer’s Tax Credit
The First-Time Home Buyer’s Tax Credit is a non-refundable tax credit valued at $750 to help first-time homebuyers recoup some of the closing costs associated with buying a home. This tax credit was introduced in the 2009 federal budget in order to help offset inspection costs, legal fees, and other closing costs.
After you buy your first home, the credit must be claimed within the year of purchase under line 369 of your personal tax return. Note that the home must be purchased under either your name or your spouse’s name in order to qualify for this tax credit.
GST/HST New Housing Rebate
Homebuyers can claim the amount paid for GST/HST on a newly constructed home through the GST/HST New Housing Rebate. Canadians who substantially renovate an existing home or rebuild a home that was destroyed due to fire or other natural disaster may also qualify for this rebate.
The GST portion of a new home purchase or renovation can be rebated to all Canadians who qualify. It equals 36 percent of the GST that all buyers need to pay, for up to $6,300, and is valid on homes with a market value of $350,000 or less.
RRSP Home Buyer’s Plan
You may qualify for the RRSP Home Buyer’s Plan (HBP) if you haven’t purchased a home within the last four years or lived in a spouse’s home in the same timeframe. This plan allows you to borrow up to $35,000 tax-free from your RRSP to fund your down payment, as long as the money was in your RRSP for at least 90 days pre-purchase.
Generally speaking, early withdrawals from RRSPs are considered taxable income, which is why this plan can be so advantageous for Canadians. In this case, they’re exempt but you will need to start repaying the amount borrowed from the RRSP two years after you buy over a maximum 15-year period.
Using Your RRSP To Buy Your First Home
Maybe you’ve stashed cash for retirement but not real estate for the last few years. Well, you might be in luck. If you contribute to a Registered Retirement Savings Plan (RRSP), you may already qualify for a program that lets you dip into your retirement funds early without a penalty. The Home Buyer’s Plan is a convenient way for some first-time home buyers to achieve their dreams now without sacrificing their plans for later.
What is the Home Buyers’ Plan?
Designed to make homeownership more accessible for working Canadians, the HBP is a program that turns your retirement savings into cash for buying a home. If you and the property both qualify, you may use this plan to take up to $35,000 out of your RRSP within one calendar year.
Of course, not everyone is eligible, and not every qualifying home buyer chooses to take advantage of it. Make sure you understand the eligibility requirements, withdrawal and repayment terms, tax rules, and other conditions before participating in the plan and withdrawing from your RRSP.
Advantages of the Home Buyer’s Plan
Why choose the HBP over other programs and methods of saving, like a Tax-Free Savings Account (TFSA)? You don’t pay tax on a TFSA, after all, so what advantage does the HBP offer?
Simply put, because the HBP uses RRSP funds, you’re not only able to save for retirement and a home down payment simultaneously, but you also get a nice tax break with the contributions you make to your RRSP. TFSAs don’t offer this tax break. While they are exempt from taxes when you make a withdrawal or deposit, you don’t get that extra break offered by RRSP contributions.
You don’t have to pay interest on your HBP funds, either. Because you’re essentially borrowing the funds from yourself, the repayment terms are generous, and the interest is nonexistent. The money does stop compounding in your RRSP, but that impact is smaller if your home increases in value or you repay the money early.
Do You Qualify?
Are you a qualifying first-time home buyer? If you’re interested in paying for your first home with help from your RRSP, start by making sure you’re eligible. You must meet the following requirements to withdraw from your RRSP:
- Never purchased a home, or haven’t occupied a home you own in at least four years (both groups qualify as “first-time homebuyers”)
- Live in Canada
- Agree to build or buy your first home by October 1 of the year after your first withdrawal (if applicable)
- Withdraw funds within 30 days of owning the home
- Agree to live in the home as your principal residence
There are some exceptions to these requirements, though. For example, if you have a disability or you’re using the funds to help a disabled person buy a home, you don’t have to be a first-time home buyer.
What is Considered an Eligible Home?
Most properties qualify for the Home Buyer’s Plan. It’s when and how you purchase your home that matters. You must be the one buying or building it, for starters. If you already purchased the home, you must withdraw funds within 30 days of owning it.
However, if you don’t own the home yet but you want to withdraw funds this year, you must buy or build your house before October 1st of next year.
What to Know Before You Withdraw from Your RRSP
Before you decide to withdraw from your RRSP, it’s important to understand all the terms. For example, how do you pay back an HBP loan? How do you qualify in the first place? Before you fill out your T1036 – the official request to withdraw funds – make sure you have the answers to these questions.
One rule to know: You have 15 years to repay yourself after withdrawing funds. You can get the funds after you own the home, but only 30 days afterwards, so most people withdraw before buying or building. When you start repaying the loan, you must repay at least 1/15 of the total amount you withdrew each year.
So, is the Home Buyers’ Plan the right move for you? As you navigate the mortgage pre-approval process, this extra source of savings could make the difference between your potential price range and interest rates. Make sure you explore this option before you commit. The Home Buyers’ Plan makes it possible for more Canadians to make investments that will pay off for years to come.
Important Factors to Consider
There are many factors to consider before you can be confident that you’re aware of everything you need to know in order to purchase your first home. This can seem daunting, at first, but in the long run, you’ll be thanking yourself for taking the leap and saying goodbye to landlords and leases for good.
Before you can begin your search for a home of your own, you must take into consideration your current credit score and budget. Having a credit score of 620 or higher will help to secure a loan with optimal terms and rates – anything lower than this could potentially lead to high-interest rate and mortgage terms that are less than ideal. If you haven’t been keeping track of your credit score to date, there’s never a bad time to start.
It also helps to formulate a budget and save up some money beforehand to put toward your down payment. It can be tempting to go above and beyond your budget, however, you must be sure that you’ll be able to put in a competitive offer and eventually keep up with your mortgage payments. The minimum amount to put down on a home valued at $500,000 or less is just 5% of the purchase price in Canada.
When deciding on your budget, remember to consider the extra costs associated with owning your own home. These costs can be overwhelming if you’re not ready for them. Some of these costs include:
- Legal fees
- Appraisal and home inspection fees
- Land transfer tax
- Land survey fee
- Home inspection fee
- Homeowners insurance
- Mortgage insurance
- Title insurance
- Moving costs
- Painting and renovations
Finally, before you pull the trigger and put in an offer on your dream home, consider the amenities you need and the ones you can be flexible on. Do you want a finished basement? Brand new, stainless steel appliances? What about a swimming pool or a spacious yard? Hardwood floors? These are all important factors to consider before you buy.
You should also consider the condition of things like the home’s roof, furnace, water heater, and septic tank. These things can be costly to repair if neglected and should always be in good shape upon purchase.
How to Apply for the First-Time Homebuyer Incentive
Once you’ve been pre-approved for a mortgage, found the home you’re looking for, and determined you’re eligible to apply for the incentive, you can apply for the First Time Homebuyer Incentive. There are two application forms to be filled out; both can be found online:
Once you’ve filled out the forms, submit them to your mortgage broker and they will submit the application for you. Make sure to give the final signed copy of the shared equity mortgage package to your solicitor to retain on your behalf.
Although buying your first home can feel daunting at first, the long-term benefits are too plentiful to ignore. There is a wide array of supports available for first-time homebuyers in Canada, so why not take advantage of them?
Even if you’re still in the early planning stages, it’s never too late to book a consultation with a mortgage broker to discuss your options. Once you are aware of the resources that are available to you and are ready to begin the search, you’ll be fully prepared to purchase and move into a home you can truly call your own.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.