Buying Your First Home: Mortgage Shopping ABC’s Part 1

Part 1: Down Payment

A down payment is the amount of money that you pay at the time of purchase toward the price of your home (your mortgage loan covers the rest). You should have a good idea of how much you can put toward the down payment before starting the process, but zero down is a possibility with www.NotaPennyDown.com

The minimum down payment for the purchase of a home depends on a number of factors like the type of home, but it is at least 5% of the purchase price of the home. For example, to buy a home for $200,000, you will need a minimum of $10,000 as your down payment. (www.NotaPennyDown.com does offer a zero down program)

Normally, the minimum down payment must come from your own funds. You may be eligible for other loans to help you come up with the down payment. However, it is always better to save for a down payment to minimize your debts.

You may also be eligible for the Home Buyers’ Plan (HBP) to help you make the down payment on your home, if you have investments in Registered Retirement Savings Plans (RRSPs).

Where can your down payment come from?

Your down payment can come from

chequing or savings accounts
Canada Savings Bonds
guaranteed investment certificates (GICs)
stocks, bonds, and other non-registered investments
Tax-Free Savings Account (TFSA)
RRSP (under the Home Buyers’ Plan)
gifts from family, or
other assets.

Remember

The bigger the down payment the money you save on interest charges.
If your down payment is less than 20%, you will have to get mortgage default insurance.
(CMHC, Genworth & AIG)

Down payment financing option: Home Buyers’ Plan

If you are a first-time home buyer, the Home Buyers’ Plan (HBP) allows you to withdraw money from your Registered Retirement Savings Plan (RRSP) tax-free to make your down payment. The HBP is administered by the Canada Revenue Agency (CRA).

There are certain conditions you must meet to be eligible for the HBP. For more information, contact CRA.

How much can you withdraw?

You can withdraw up to $25,000 from your RRSP.
If you buy the home together with your spouse, partner, or someone else, each of you can withdraw up to $25,000, for a total of up to $50,000.
The withdrawal from your RRSP does not need to be included in your income on your annual income tax return, and no tax is taken off the money you withdraw.

What is the payback period?

You don’t have to start paying back the money to your RRSP until two years after the purchase of the home.
You must pay back all withdrawals from your RRSP within 15 years by making RRSP deposits each year, starting the second year following your withdrawal. CRA will determine what your minimum yearly repayment will be and will notify you once you need to start repaying the amount.
If you do not repay the amount due in a given year, it is included in your taxable income for that year and you’ll have to pay income tax on this amount.

Example: HBP reimbursement

In 2010, Martin withdraws $6,000 from his RRSP to participate in the HBP to buy a home. Martin’s minimum yearly repayment to his RRSP, starting in 2012 (two years after purchase), will be $400 ($6,000 ÷ 15 years).

If Martin decides not to make any reimbursement in 2012, he will have to include $400 in his income when he files his 2012 income tax return. His minimum yearly HBP repayment, however, will remain at $400 for the following years.

On the other hand, if Martin decides to make a HBP reimbursement of $1,000 to his RRSP in 2012, his minimum yearly repayment for 2013 and the following years will be $357.14 ([$6,000 - $1,000] ÷ 14 years).

Questions you should ask yourself

Will you be able to make the annual repayment to your RRSP each year?If not, using your RRSP funds to purchase a home can cost you a lot in income tax.
Can you avoid paying mortgage default insurance by using your RRSP investments to increase your down payment?If so, the savings may be significant.

We can help you find answers to these and other questions that you may have.