Home buyers' Plan

Are you considering buying your first home in 2018?

If you need a source for your down payment, The Home Buyers’ Plan (HBP) will allow you to withdraw up to $25,000 from your RRSP to help buy your first home, tax-free.

If you are buying with someone who is also a first time home buyer that amount can be increased to $50,000. You can use up to $25,000 to add to any down payment amount you may have saved or use toward other expenses for purchasing a home.

You do not need to use the withdrawn funds for only your down payment as they may be used for any purpose that assists with the purchase of your first home — closing costs, paying off outstanding debt, renovations, etc.

You must have a written contract in place agreeing to buy a home and the home must be owner-occupied within one year.

The amount that you have withdrawn from your RRSP must be paid back into your RRSP account in annual payments and you have 15 years to repay, but if you don’t make your annual payment, it will be added to your annual income and you will be taxed accordingly.

If you make a withdrawal from your RRSP, but do not meet the first-time homebuyer eligibility requirements, this withdrawal will be taxed and you must include it in your income tax return as taxable income.

What if you don’t have any RRSP savings? You can get your savings working for you in a tax free and efficient way. This strategy might be right for you.

If you have room under your RRSP contribution limit you could secure a RRSP loan and contribute those funds and then later use them towards your down payment.

If you aren’t sure whether you have room to contribute, check your Notice of Assessment (NOA) for last year.

Each year you are allowed a percentage of your income to contribute to a RRSP and the amount is carried forward and added to the next year’s total either partially or in full if you haven’t contributed.

It’s important to note that the funds you plan to withdraw and put toward the purchase of your home, must be in your account for 90 days prior to your withdrawal.

If you have used the Home Buyers’ Plan in the past, but have not owned a home for four years, you may qualify to withdraw from your RRSP again as long as you or your common-law partner or spouse did not occupy a home that either of you owned in that four year period.

If you think that this makes sense for you and your financial situation, you may want to take the necessary steps no or before the RRSP deadline date for 2017 contributions.

If you would like more information on the RRSP Home Buyers’ Plan, please give me a call at 888-561-2679 or email [email protected] and I can give you some guidance and help you decide what is right for your situation.

Credit rating and mortgages

A lack of basic financial knowledge can be the difference between getting a mortgage at a great rate and having a mortgage with an alternative lender where you end up having to make a much a higher payment.

Your Beacon Score, which is shown on your credit report, indicates to a mortgage lender the probability of whether you will successfully make your mortgage payments on time.

Beacon scores can range from a low of 300 up to a high of 900, which is the highest possible score. A good credit score would be in the mid to upper 600s and a credit score below 620 could prevent you from obtaining a mortgage a bank.

So what makes up your credit score?

  • 35 per cent is for late payments, bankruptcies, collections and judgments
  • 30 per cent is for current debts
  • 15 per cent is for how long accounts have been open and established
  • 10 per cent is for the type of credit, such as credit cards or personal loans
  • 10 per cent is for new credit enquiries

Here are some examples of the common mistakes that homeowners or potential homeowners make that can result in a poor credit rating.

  • Chronic late payments. Do not ignore the small stuff. No matter what the size all bills must be paid on time, including your cell phone.
  • Maxing out your credit cards. You should not exceed over 50 per cent of the limit on your card. Even if you pay off the balance every month, it will still negatively affect your Beacon Score. Spread your spending out over a few cards.
  • Do not over apply to creditors and lenders. Don’t fill out applications at car dealerships if you are shopping for a car. Don’t fill out the credit card application at the booth in the mall or the airport. Every time you fill in an application they will check your credit.

A great tip for managing your credit is to pull your own credit report at least a couple of times a year. It is the responsibility of a consumer to correct any errors and it takes a long time for reporting to be amended should there by an error.

If you need to repair your credit the best tactic for improving your credit score is to consolidate debt. Taking out a short term second mortgage to pay off all debt will basically wipe the credit clean so it is positive.

By allowing two or three months for the reporting to go through to the credit bureau a few times, the report will start to show a higher credit score and you will now be considered for more competitive interest rates at an ‘A’ lender.

There are some easy steps that can be taken to improve your overall financial picture and ensure that you are getting the best terms and rates whether you are renewing your current mortgage or looking to purchase your first home.

Moving from bruised credit to “A” credit simply takes time and sound advice. A great rate is within reach.

Give me a call if you would like some advice and assistance to improve your credit score.

Invest in Kelowna real estate

You may have heard recently that analysts indicate now is a great time to invest in Kelowna real estate.

They make that suggestion because Kelowna offers higher returns on real estate investment than Vancouver and boasts a host of new developments at lower costs.

There is high demand for real estate being driven by a high job growth rate.

Purchasing and investing in real estate has always been attractive for those looking to generate additional income and benefit from the wealth created with increases in property values over time. Is investing in real estate right for you?

The Attraction

Diversification is key to anyone’s investment portfolio whether you are talking about mutual funds, TFSAs, stocks, bonds, RESPs, RRSPs, etc.

Diversification helps balance risk and provides a level of confidence that your investments are still going to be there when you are ready to liquidate them, such as at retirement etc. Some would consider adding real estate, other than their principal home, to their portfolio to ensure full diversification.

A real estate investor can still use a relatively small amount of down payment or capital to purchase a property, and this can provide an attractive return on investment (or ROI). This return is generated from a combination of monthly income and property value increases.

The monthly income is generated by taking the rent collected from tenant and then deducting all the expenses. To ensure that there is a positive cash flow, smart real estate investors work with a mortgage broker and realtor who can assist with the analysis.

Equity is built in the property by way of appreciation of value over time as well as with each mortgage payment.

With mortgage interest rates at record lows and an abundance of potential tenants in our local area, there is a high demand for real estate investors to take the plunge.

Here’s another way to look at it as well. Real estate investment is also beneficial for those who have a hard time saving money, as it can act as a sort of forced savings account.

Essentially, as you pay down the principal of a mortgage, you're reducing debt and building equity. Then, when you go to sell the property, the money you receive back from the sale is considered your forced savings.

So What is the Risk?

Like any investment, there is risk and it is possible to lose money in real estate, albeit relatively low.

Real estate has shown to appreciate steadily over the long term, and has for the past 25 years, so the chances of someone losing money on a purchase are pretty slim.

However, keep in mind that doing your due diligence before an actual purchase is key. You must take into consideration certain factors when choosing a property, such as desirability of location and stability of the market in that area.

The first step, before you start looking at properties, is to know your financing options particularly with the new mortgage qualification stress test coming into play on Jan. 1, 2018. You also need to have a plan and understand your acquisition and exit strategies.

Review your mortgage today

There has never been a better time to review your current mortgage particularly with the new rules that will require a stress test for all mortgages.

Life changes, families grow, job’s move, retirement objectives shift. There are any number of reasons why your mortgage and possibly your entire financial picture should be evaluated from year to year. Maybe there are no changes needed but if there are, it’s better to identify them early.

The mortgage that you signed up for a few years ago may no longer be the best fit for you. Doing a financial check-up is a very smart thing to do annually. Many often just wait for the renewal letter before they look at their mortgage and then go back to their current lender without considering whether that mortgage meets their current needs.

Here are some reasons why you should be reviewing your mortgage today – before the new mortgage rules are implemented.

Your mortgage is up for renewal in the next six months

Mortgage renewals in particular are one of the most neglected decisions made during the life of a mortgage. Many homeowners stay with their existing mortgage lender because they believe it is too time consuming to shop around for a better rate. Or, they simply think that the offer from their existing bank is the best deal available. Unfortunately, that is not correct! 

Bank renewal rates are extremely high because most people unfortunately do not take the time to shop around at renewal time. The reality is,you are not going to take the same care and diligence that you did when you first took out your mortgage.

As a result there is very little incentive for the bank to offer you their best rate at renewal time. They are really hoping that you will just sign the renewal notice you receive in the mail and be done with it.

You have high interest credit card debt

There are great possibilities for real savings by using the equity in your home as a debt consolidation tool.

The most attractive reason for consolidating debt into a mortgage is that there will definitely be savings simply by lowering the interest rate you are paying on your debt. Another reason would be to lower your monthly payments.

This could free up cash flow to start investing and saving for retirement.

You are planning for home renovations

If you are planning a renovation soon, use the equity in your home by refinancing your current mortgage to take advantage of today’s low interest rates. You can spread out the repayment over a longer period of time and use funds at rates that are lower than a credit card or unsecured line of credit.

There are so many things that a mortgage can do for you. It can help you become more tax efficient, build wealth for retirement, renovate your home, consolidate high interest credit card debt or perhaps invest in a business and so much more.

Don’t wait for your mortgage to come up for renewal and don’t wait until after you have made a major change in your personal situation. By reviewing annually you will ensure you stay financially fit and ahead of these mortgage rule changes.

These new mortgage qualifying rules could definitely hinder some of your future plans so please give me a call at 888-561-2679 or email [email protected] for a no obligation review of your mortgage.

More Mortgage Matters articles

About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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