Photo: Getty Images
By Chuck Duerden
If you are looking to enter the housing market — and if you meet the definition of a first-time buyer plus other conditions — the federal government will help you buy or build.
It will allow you to withdraw funds directly from your Registered Retirement Saving Plan (RRSP). That’s tax-free.
This is made possible through the Home Buyers’ Plan (HBP), under which you are allowed to withdraw up to $25,000 from your RRSP in a calendar year for the purpose of acquiring a home for yourself or a disabled relative.
Your spouse can also draw up to $25,000 out of his or her RRSP if you’re planning to buy or build a home together, if both of you meet the HBP’s qualifications. In the case of a spousal RRSP, monies may be withdrawn under the Program in the name of the annuitant, or owner, rather than the contributor.
If you withdraw more than $25,000, you will be liable for taxation on the excess.
A program as generous as this does not come without conditions.
- The contributed monies you withdraw from your RRSP must have been in the account for a minimum of 90 days before you can take them out under the HBP.
- Otherwise, they may not count as deductions for any year in which case the Canada Revenue Agency (CRA) will levy a tax on them. So watch out.
- The funds you have taken out from your RRSP must be paid back over the next 15 years. It does not matter if the original HBP withdrawal came from a regular RRSP or from a spousal one; the funds must be repaid to a regular RRSP.
- If you do not repay on schedule, the required amount is added to your taxable income for the year. However, you can repay the full amount into your RRSP(s) at any time. If you don’t, then the CRA will send you a Home Buyers’ Plan statement of account, with your notice of assessment (or reassessment).
- The home that you buy or build must become your principal residence within one year of completing the purchase or the construction. If you’re buying or building for a relative with a disability, that person must likewise occupy the home as his or her principal place of residence.
- In other words, the home must be for you rather than something you plan to rent out.
- We come to the thorny question of what constitutes a first-time home buyer under HBP rules.
- Get this: rather than being disqualified if you have ever owned a home in Canada, the rules state you are considered a first-time home buyer if, within the preceding four years, you did not occupy a home owned by you alone, or in conjunction with your spouse or common-law partner.
- To make the program even more accessible, even if you have taken advantage of the HBP before, you might still be able to participate again, providing your repayable balance on your HBP account is zero on Jan. 1 of the year you wish to make another withdrawal.
All this is all well and good, I hear you say, but what if neither I nor my spouse have $25,000 in our RRRSPs or anything like the amount necessary for the down payment on the home of our dreams?
Fear not, for qualified applicants, it may be possible to borrow money from a specialized lender to purchase an investment to place in an RRSP.
The same rules for withdrawing funds apply as before; an investment purchased with an investment loan must remain in an RRSP for 90 days before it can be withdrawn, and then of course liquidated to free up the necessary cash.
That means having selected your dream home, and presumably qualified for mortgage financing also, you must cool your heels for three months before you can start moving to purchase it.
You’re probably wondering what happens to the loan you took out to purchase the investment for your RRSP. Well, it will continue to exist and continue to require servicing as part of your overall debt load.
That’s the downside of this strategy; besides the debt of your mortgage you will also have the debt for your down payment.
Obviously, it is an approach that should be attempted only if your credit is strong. And that’s where we come in; if you are considering using a leveraged load to access the Home Buyers' Plan, or even using your RRSP to access the HBP without such a loan, talk to a financial adviser first.
These are relatively complex financial strategies, and, as we have mentioned, not without an increase in risk.
We would be remiss, particularly for our readers in British Columbia, if we did not mention a new program recently announced by the provincial government to assist would-be home homebuyers.
If you are a first-time home buyer (that phrase again!) the B.C. H.O.M.E. Partnership Plan will match what you have saved for a down payment up to $37,500 or five per cent of a maximum purchase price of $750,000.
For the first five years, the loan will be interest free and payment free. After five years, buyers can either repay their loan or enter into monthly payments at current interest rates. Like most mortgages, loans awarded through the program become due after 25 years.
Conditions as always do apply and in this case, unlike the Home Buyers' Plan, an important one is that to qualify as a first-time buyer for the H.O.M.E. program you must not have owned an interest in a residence anywhere in the world at any time.
Another stricture is that you must intend to reside in the home you are purchasing with the aid of the Program for the first five years.
You must have obtained a high-ratio insured first mortgage on the property for at least 80 per cent of its purchase price.
(A high-ratio mortgage is one in which a borrower places a down payment of less than 20 per cent of the purchase price on a home.)
Also, since the Program is geared to fostering home-ownership among middle-to-lower income British Columbians, the maximum combined annual income of all persons on the title must not be greater than $150,000.
Since this is a matching program, by implication you must have a down payment amount at least equal to the loan for which you plan to apply.
When coupled with the federal Home Buyer’s Plan mentioned above, the B.C. H.O.M.E. Partnership Plan greatly expands the possibilities of home ownership for qualified applicants.
It should be stressed once more that given its complexity such a strategy should not be attempted solo but rather with capable financial adviser.
Chuck Duerden is an insurance and investment consultant at Septen Financial.
Photo: The Toronto Star
You can use your RRSP for all or part of your down payment, but the rules have changed in recent years.
If you think you know them, double check here.
What is it?
In February 1992, the federal government introduced the Home Buyers’ Plan (HBP), which allows RRSP plan holders who are also first-time home buyers to use up to $25,000 of their RRSP to apply to the purchase of their home.
The plan, extended twice, is in effect as of July 1997 until further notice.
Who is eligible?
Buyers who have not owned a property in the last five years.
How does it work?
Up to two partners in the home can combine their RRSPs for a total maximum of $50,000.
The only subsequent requirement is that they pay the withdrawals back into their plans (without further deductions) over a maximum of 15 years.
Failure to do so will result in 1/15th of the RRSP initially withdrawn having to be added back to taxable income in any year the minimum re-deposit is not made.
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 $9,000 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 take 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.
What else should you know?
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 per cent.
Another $600 per month could well make the difference in whether or not you’ll qualify for a mortgage.
Call us today 250-862-1806 so that we can further explain this unique program to you.
There has been a lot of talk regarding fixed and variable rate mortgages and which one is best for you.
Prior to the new regulations introduced by FICOM on Oct. 19, most first-time buyers were encouraged to take a five-year fixed term because it allowed them to qualify at the discounted rate.
Any mortgage that had a term of less than five years or a variable rate (floating rate) had to be qualified using the prescribed or posted rate of interest which was often two percent higher.
Since the new rules came into effect, many mortgage applicants—including conventional mortgages—are being qualified using the prescribed rate which is currently at 4.64 per cent.
This new change allows clients some flexibility in the term they select.
The current five-year discounted rate is about 2.69 per cent for a five-year fixed while a variable rate is at prime minus-0.65 per cent, or 2.05.
The payment on a $100,000 mortgage at 2.69 per cent amortized over 25 years would be $457.48, while the payment on a variable rate would be only $425.87.
The decision should be based on your comfort level with risk as most economists are certain that interest rates will rise as opposed to drop or remain at the current lows.
If you were to use the savings every month to pay extra on your mortgage, this would be a worthwhile as the savings would compound with the extra payments.
There are a couple of questions that you can ask yourself to help you determine which rate is best for you:
Do you need to know exactly what your payment is going to be over a longer period of time?
Do you consistently watch rates and market conditions?
Can you handle any sudden rate increases that could increase your payment?
If you answered “yes” to the first question, then a fixed rate is better for you.
If you answered “yes” to the last two questions, then you may want to consider a variable rate.
How to Increase Your Credit Score
Good credit translates into lower interest rates for the borrower.
Here are just a few quick tips that can help put you in a better position under the discerning eye of an underwriter.
HOT TIP! Do you have past due balances that have been neglected? If they are showing up on your credit report and you want to purchase a home, make sure you bring them up to current status whenever possible.
HOT TIP! Do you have outstanding debt that you can afford to pay off right now? Try to get these accounts down to a zero balance, or at least a lower balance. If your cash on hand doesn’t allow you to do this, try to distribute the debt among other open credit cards.
You can also consider opening a new line of credit and transferring part of the balance off a card that is close to being “maxed out.” If you can get the resulting balances below 50 per cent of the available credit, you’re on the road to improving your credit score considerably in most cases.
HOT TIP! Do not close existing credit card accounts, even if you don’t want to deal with the company any more… Believe it or not, the credit history is a good thing to have.
HOT TIP! When married couples keep separate credit card accounts, some or all of the balances can be transferred to one spouse’s list of accounts. This gives the other spouse an opportunity to increase their credit score and designate him or herself as the sole borrower on the mortgage loan.
Ownership of the home can sometimes remain in both names.
HOT TIP! See if your credit provider will increase your available lines of credit. This can, in turn, reduce the overall debt ratio, but only do this if your credit card company can do that without a hard credit inquiry.
HOT TIP! Do you have past dues and charge-offs within the last two years? Pay them off now, if you can. Past dues older than two years will have little to no impact on your credit score if they are paid, but can possibly bring the score down, which is something we don’t want to do... Focus on that two-year time frame.
HOT TIP! Do you see errors in your report? Request the credit bureau delete any outstanding debt that is incorrectly charged to you, or things that should have been removed that you have already paid. They have an obligation to reconcile this within 30 days.
If you see items on your report that are less than two years old and you have the money to pay it off now, mark the back of your payment cheque with the following notation:
"Accepting this cheque is evidence that the transaction is complete and this charge will be deleted from my credit record.”
If necessary, you can use this cancelled cheque as proof of the transaction in the event the outstanding debt is not removed promptly and interferes with the closing of your mortgage.
If you need help with understanding or improving your credit report please call 250-862-1806 or email [email protected].