When you have spent a lot of time looking for a home and finally have one of your dreams, it can be tempting to buy it, no matter the price. Before you can go through the front door, you will have to pay a down payment. Once you have made an acceptable down payment and purchased default mortgage insurance (if necessary), you will start mortgaging your home, amortizing its total value over approximately 25-35 years (depending on a number of factors, including if you have a mortgage insured by CMHC), until the house is fully paid.
However, before starting this process, you will need to determine exactly how you intend to finance the down payment. After all, depending on the price of the house, even a minimum deposit of 5% is not such a small amount of money for most people. This is where the Home Buyers’ Plan can come into play.
Down payment and mortgage
Before deciding which action plan to adopt to become a first-time homebuyer, it’s good to have an idea of what the down payment and your future mortgage will cost in the long run. Since February 15, 2016, some significant changes to the Canadian Housing Rules, including the Home Installment System, have been put in place to ensure potential buyers do not end up with mortgages they can not pay. For example :
- Houses valued at $ 500,000 or less now require a minimum deposit of 5% of the total price.
- Houses costing $ 1,000,000 now require a minimum deposit of 5% of the first $ 500,000 and 10% of the balance remaining
- For homes valued at 1,000,000 and over, a deposit of at least 20% is required
With regard to mortgages:
- A conventional mortgage-means that a buyer will make a down payment of 20% or more on his home
- A High Ratio Mortgage-means that a buyer will make a down payment of between 5% and 19.99% on his home
Depending on its location and condition, a typical suburban home will likely cost more than $ 350,000. More than double that price if you’re trying to buy a house in one of Canada’s big cities, like Vancouver or Toronto, where a two-story condo can cost more than $ 1,000,000. With prices like these and all other costs associated with a home, it is common for first time buyers to make a down payment of minus 20%. It is of course better to make a payment over 20%, but their current income might not allow it, so they must be realistic. A high ratio mortgage is often a more affordable option, but in this case, the buyer will likely make his monthly payments over a longer period than someone with a conventional mortgage.
Those with high ratio mortgages will also need to qualify, and then purchase “mortgage loan insurance” from one of Canada’s three mortgage insurance providers. These three main suppliers are: Canada Mortgage and Housing Corporation, Genworth Financial Canada, and Canada Guaranty. The insurance premium a buyer must pay will vary depending on the percentage of the down payment and the amount he plans to borrow from his lender.
What is the Canadian Home Buyers’ Plan?
As mentioned above, the Home Buyers’ Plan will be useful when an initial buyer pays down on his mortgage. The HBP is a type of program in which eligible buyers contact the Canada Revenue Agency, complete Form T1036 and can extract up to $ 25,000 from their RRSP, tax-free, during the course of the year. ‘fiscal year. If the spouse also has an RRSP, it is also possible to take up to $ 25,000 from their account. They can then use these funds to fund the down payment of their new home.
However, after withdrawing the money, in the second year after the withdrawal, they will have to start repaying their RRSPs. You must also repay the total amount of funds withdrawn within 15 years of withdrawal or face tax penalties.
Is it better to withdraw funds from your RRSP or TFSA?
Unfortunately, in today’s housing environment, even the total amount you are allowed to withdraw from your RRSP ($ 25,000) is not a huge amount, considering all the other costs of living. accommodation that you will need to cover. For example, if your house costs $ 400,000, this $ 25,000 will cover about 16% of the amount. This is enough to fund the down payment for a high ratio mortgage, but you could end up with an empty RRSP for your retirement until you have paid it back. One of the benefits of the Home Buyers’ Plan is that you will be eligible for a tax deduction through this program. You can then reinvest the money you receive from this deduction into your RRSP.
All in all, some real estate specialists say that it may be beneficial for your financial future to withdraw the necessary funds from your tax-free savings account rather than your RRSP. Certainly, taking the money out of your savings has disadvantages, mainly that you are going to pawn in the money that you could use for something other than your retirement. However, a major benefit to many people is that they will not have a specific time when they will have to repay the money withdrawn. So, do not forget to take these considerations into account before you decide.
Properly declare your renewed contributions
If you plan to fund your down payment using the RRSP Home Buyers’ Plan, there is one thing you absolutely must do. As you repay the money to your RRSP account, you will need to make sure your contributions are reported to the Canada Revenue Agency. In the past, homebuyers made this mistake by accidentally contributing to their regular RRSP account to suddenly default on their HBP loan. The CRA must know that your renewed RRSP contributions are used to pay back the Home Buyers’ Plan, not your usual account.
Benefits of paying off your RAP quickly
Let’s say you decided to withdraw the maximum amount from your RRSP account: $ 25,000. For example, you will then intend to repay it within 15 years of minimum payment. 25,000/15 = $ 1,666.66 per year.
However, if you decide to pay a little more and round up your payments to $ 2,000 a year, you will end up repaying the money in about 12.5 years. Anything you add from that point on will simply be an additional contribution to your regular RRSP. This seems to be a realistic goal for everyone, and if you wish, you can even pay more in the beginning, then pay less for the remaining years. Example: If you manage to repay $ 5,000 a year for three years, you will have donated $ 15,000. With the remaining $ 10,000 you can reduce your payments to $ 2,000 and, five years later, your RRSP account will be fully replenished. The faster you pay, the sooner you can save for retirement.
The disadvantages of contributing more than the minimum amount
Contributing more than the minimum annual amounts required for your RRSP has the same disadvantages as applying to any type of mortgage, automobile or home ownership plan.
In the end, you will have effectively repaid your RAP quickly and can start spending your money elsewhere. However, the additional (fictitious) amount of $ 334.34 that you added to your RRSP repayments could have been used for mortgage payments per se. You could have put them in your regular RRSP, where they would have generated some interest over time and would have helped you retire a few years earlier. They could also have been better spent, such as for car payments, student debt or even everyday expenses such as groceries and household products for which you now need a loan.
So, is it better to pay off your RAP quickly?
It really depends on your annual income and your responsibility for savings. Keep in mind that a home is a big financial responsibility. During your life as an owner, you will certainly encounter expenses that exceed the cost of your mortgage. Which means it may be in your best interest to have money available to help you cover some costs.
For example, if you plan to use the Home Buyers’ Plan to fund your down payment, instead of another form of financing, the choice to pay it quickly or on time will have advantages and disadvantages. . Before making an important decision, it is very important to review your finances, discuss all possibilities with your partner and then consult a financial advisor.