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Mortgage-Matters

Home Buyers' Plan

Are you considering purchasing your first home next year?

If so, before March 1 could be the best time to implement this strategy if you are thinking about buying this spring.

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 use in assisting with the purchase of your first home, tax free.

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

To provide first-time home buyers with greater access to their RRSP savings to purchase or build a home, Budget 2019 proposes to increase the Home Buyers' Plan withdrawal limit to $35,000.

This would be available for withdrawals made after March 19, 2019. (Please check with your financial institution or the CRA for the current status for withdrawal amounts.)

To help Canadians maintain homeownership, Budget 2019 also proposes that individuals that experience the breakdown of a marriage or common-law partnership be permitted to participate in the Home Buyers' Plan, even if they do not meet the first-time home buyer requirement.

This measure would be available for withdrawals made after 2019.

The amount that you have withdrawn from your RRSP must be paid back into your RRSP account in annual payments and you have 15 years to repay them but if you don’t make your annual payment then 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.

So 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 have funds sitting in unregistered savings you could also move those into a registered account.

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 towards the purchase of your home, must be in your account for 90 days prior to your withdrawal.

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 purchase a home and the home must be owner-occupied within one year.

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 would like more information on the RRSP Home Buyers’ Plan, please give me a call at 1-888-561-2679 or email [email protected] and I can give you some guidance and help you decide what is right for your situation.



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Home equity line of credit

HELOC is a type of home equity loan and is a revolving amount of credit that is secured against your property.

You can access up to 65% of your home’s value however the outstanding balance on your mortgage and line of credit combined cannot exceed more than 80% of the value of your home.

It always has a variable rate of interest based on the current prime lending rate which today is 3.95%. Rates generally start at prime plus .50% and up depending on your qualifications and the lender.

It is fully open which allows for flexible prepayment without any penalties. You can use the amount available for any purpose you want and only pay interest on the amount of the outstanding balance. The minimum required payments are interest only.

It’s a great option for accessing equity in your home to put into other investments.

It can be a first position charge or be a second position charge behind your current conventional first mortgage to a maximum of 80% of the value of your property.

PROS

  • The interest only payments can be lower than a standard mortgage payment
  • The terms are fully open which allows flexibility
  • The interest calculations are simple
  • The cost of borrowing is less than an unsecured line of credit

CONS

  • The interest rates are higher than conventional mortgages. For example 4.45%compared to a five-year fixed term mortgage at today’s rates of 2.89%
  • A charge is registered against your property so if you sell your property the line of credit will have to be paid in full
  • If you are carrying a long0term balance the cost can be expensive
  • There is no principal reduction in the amount you owe if you are only making interest payments
  • The rate will fluctuate based on changes in the prime lending rate
  • A line of credit is not portable so it can’t be moved to a new property and must be paid in full if you sell your current home

There are a few other facts that should be known about HELOCs.

  • The rate can be increased at any time
  • Your lender can demand the balance outstanding on your HELOC at any time
  • Your lender can raise or lower the credit limit at any time

A home equity line of credit can be a great product if it’s being used as intended as a revolving line of credit but it can also be risky as it uses up the equity in your home which for many is the only way to build wealth and savings for the future.

In a 2017 report, FCAC (Financial Consumer Agency of Canada) found home equity lines of credit may be putting some Canadians at risk of over-borrowing.

That report found most consumers do not repay their HELOC in full until they sell their home.

About 19% of respondents to the survey said they'd borrowed more than they intended and many didn’t know how much they owed.

If you have been carrying the balance on a HELOC for a long time without any principal reduction then it might be time to consider other mortgage options.



Alternative-lender mortgages

Everyone likes to believe that they will qualify for the best rates and terms when they start shopping for a mortgage, but this isn’t always a reality.

Most residential mortgages will fit into three categories:

  • “A” lenders – Chartered banks, credit unions and monoline mortgage companies. These lenders offer the best rates and terms including insured mortgage products.
  • Alternative lenders – These are regulated mortgage lenders. They are banks, trust companies and monoline mortgage companies. Rates are slightly higher and there may be fees to set up the mortgage. Many of these companies also offer “A” products to their clients.
  • Private lenders – Investment companies and private individuals who are willing to lend their funds and typically have higher rates and fees while offering shorter terms.

An increasing number of homeowners are now turning to alternative lending solutions for a variety of reasons including it being more difficult to qualify for mortgage with the tougher qualifying rules.

Here are a few situations where an alternative lender can provide solutions.

You are self-employed

Writing off expenses to minimize tax implications is great for tax planning, but it will leave you reporting minimal income on your tax returns.

Conventional lenders want to see verifiable income while alternative lenders understand this strategy and can offer competitive products. The rates with many of these lenders aren’t much higher than the “A” lenders.

Alternative lenders have now become the lenders of choice for many business owners. The higher rates may be offset by the structuring of the corporation.

Bruised or damaged credit

We aren’t always in control and life happens. Marriage breakdowns. Health issues. There can be many reasons why credit can be damaged.

Alternative lenders will look at the overall picture and if there is strong income and employment history, they can offer a temporary solution while you work on repairing your credit with the intention of moving back to an “A” lender.

Non-typical income sources

With this new economy many people now have alternative sources of income – part-time employment, an online business or side gig, Air BnB, or tips.

“A” lenders will want to see a two-year history of this income being declared on your tax returns before they will include it in your qualifying income.

Some alternative lenders may consider this income based on the overall strength of your application.

New stress test implications

The stress test has definitely made it harder to qualify for a mortgage. You now have to qualify at a rate two per cent higher than the contract rate. “A” lenders are restricted to working within certain debt service ratios.

Depending on your down payment and credit history alternative lenders may consider extending these ratios for qualifying.

Alternative lenders have a very important role in Canada’s lending market assisting clients that don’t fit with “A” lenders.

It’s important that you engage a mortgage broker that is experienced in private and alternative lending to ensure you are receiving the best options and advice including a plan for the future.



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Investing in real estate

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.

Have you wondered if investing in real estate right for you? Here are a few things to consider.

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. Many investors add 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. Analyzing a property to ensure that there is a positive cash flow is important as is working with a mortgage professional who is experienced in real estate investing.

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 still low and an abundance of potential tenants in many areas, 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.”

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.

One more attraction is the fact that it really only requires part of your time, is flexible, and the skills can be learned.

Financing Options and How do I get started?

Purchasing a rental property can be a great investment to build wealth so get educated and enlist the assistance of professionals.

If you would like a complimentary Cash Flow Analysis of any property you are considering or to discuss your financing options, give me a call me at 1-888-561-2679 or email [email protected].



More Mortgage Matters articles

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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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