Being a first time home buyer is exciting, but can also be intimidating because of all of the information and options available to choose from. It is important to do enough research before deciding what home to purchase so that as a first time home buyer, you get the best deal possible on a mortgage for your new home.
Here are a few important things that a first time home buyer should consider:
As a first time home buyer you are allowed to put as little as 5% for a down payment. However, any home buyer that is providing less than 20% as a down payment on their home is required to obtain mortgage default insurance which is also commonly known as CMHC Insurance , although this type of mortgage insurance is available from 3 providers, Canadian Mortgage and Housing Corporation, Sagen (formerly known as Gentworth Financial, and Canada Guaranty. This serves as insurance for the lender in the event that the borrower can no longer make their monthly payments. The higher your down payment, the less your CMHC insurance payments will be. Getting an insured mortgage or insurable mortgage can also help you get approved at the lowest mortgage rates available to you.
If you have a retirement savings account you might be eligible for the RRSP Home Buyers’ Plan . It allows you to take up to $35,000 out of your RRSP tax-free to help finance the purchase of your first home. Read our blog post on the Canadian First-Time Homebuyers Incentive for more information and detail about the program.
The First Time Home Buyers’ Tax Credit gives first time buyers that chance to regain some of the costs they paid in the purchase. It mostly applies to closing costs such as legal fees and inspections.
In certain provinces like Ontario, British Columbia, or Prince Edward Island, home buyers can qualify to get a rebate on some of the Land Transfer Tax they paid. Torontonians are eligible to get a rebate on top of the provincial allowance if they are a first time home buyer.
Let us take explore the RRSP Home Buyer's Plan (HBP) in more detail.
The Canadian government's Home Buyers' Plan (HBP) allows first time home buyers to borrow up to $35,000 from their RRSP for a down payment, tax-free. If they are purchasing with someone who is also a first time home buyer, both can access $35,000 from each of their RRSP’s for a combined total of up to $70,000.
Since the HBP is considered a loan, it must be repaid within 15 years. Fortunately, this is an interest-free loan so the borrower will only be required to pay back into their RRSP the original amount withdrawn.
In order to participate in the Home Buyers' Plan, borrowers must print off a copy of the Form T1036 . This form is available on the Canada Revenue Agency's website (www.cra-arc.gc.ca). The borrower must fill out Section 1 and take it to the institution that holds their RRSP so that the institution can fill out section 2.
The financial institution will send the customer a T4RSP form which will confirm how much they withdrew from their RRSP as a part of the Home Buyers' Plan. This form must be referenced on their income tax return for the year they made the withdrawal.
Since the Home Buyers' Plan is considered a loan, you must repay the amount you withdrew from your RRSP within 15 years, with the first payment due two years after you first withdrew the money. The Canada Revenue Agency will send you a Notice of Assessment which will indicate the amount of the loan you have repaid, the balance left to be repaid, and the amount of your next payment.
To start repaying the loan you must make a contribution to your RRSP in the year the repayment is due or in the first 60 days of the following year.
Let's look at an example where a customer bought a home in 2020 and withdrew $35,000 from their RRSP to put towards their down payment. The first payment is due two years later, in 2022. They can start repaying anytime throughout the year 2022 and have until the first 60 days of 2023 to do so. This is as per RRSP contribution rules stating that a deposit can be made for the previous fiscal year up to 60 days in the year after.
Since this is an interest-free loan using their RRSP, the minimum yearly payment would be simply divide the amount withdrawn from your RRSP for the purposes of your down payment and divide that by 15 years.
$35000 / 15 = $2,333.33
In the example above, the borrower would have a minimum payment of $2,333.33 to pay back into their RRSP every year.
At Clover Mortgage, we know there are many great resources available to first time home buyers and we are determined to make sure you take advantage of them. Our trusted mortgage professionals will help you understand what you are eligible for and ensure that you get the most from your first home purchase.
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