If you are planning to purchase a home, the good news is that the federal government has created investment tools and incentives to help homeowners. These are especially important when you consider that a high-ratio mortgage—one with a downpayment of less than 20% of the purchase price—incurs mortgage insurance costs.
Understanding mortgage insurance, incentives and tax-saving investment vehicles can save you thousands of dollars.
Mortgage Insurance
According to the Canadian Mortgage and Housing Corporation, mortgage loan insurance is typically required by lenders when homebuyers make a downpayment of less than 20% of the purchase price. Insurance fees range from 0.6% to 4.5% and most lenders pass this cost onto the customer. As an example, on a condominium costing $250,000, a downpayment of less than $50,000 would incur insurance adding as much as $10,000 (plus any compound interest) to the cost of the mortgage. According to CMHC, insurance can be paid in a lump sum or added to the mortgage.
Homebuyers can avoid high-ratio mortgages by saving as much as possible for a downpayment and there are investment vehicles and incentives to make this more attainable.
Investment Vehicles
RRSP
When does it make sense to use RRSPs to help fund your downpayment? Typically, it works best for first-time homebuyers.
The RRSP was developed by the federal government to encourage Canadians to save for their retirement. Contributions reduce income tax, often resulting in a tax refund. When people retire and are earning less money, they can withdraw funds at a lower income tax rate. This investment tool can also be beneficial to first-time homebuyers.
Through the Home Buyers' Plan (HBP), first-time homebuyers can withdraw up to $25,000 from their RRSP without paying any tax on the withdrawal. The federal government is proposing to increase the HBP withdrawal amount to $35,000 as of this writing in November 2019.
According to Revenue Canada’s website, homebuyers generally have up to 15 years to repay the HBP amount in annual increments. It can be repaid more quickly, if desired. Repayments to an RRSP through the HBP, do not count toward a person’s RRSP deduction limit, so it is possible to continue making contributions (within one’s limit) even while repaying the HBP.
RRSP Warning: If you withdraw funds from an RRSP to pay a downpayment, but you are not a first-time buyer enrolled in the HBP, your RRSP withdrawal will count as income. That can result in a nasty income tax bill.
TFSA
If you are not a first-time homebuyer, consider saving for your downpayment within a TFSA. Any gains within the TFSA are tax-free. The TFSA contribution amount has varied from $5,000 to $10,000 since being established in 2009. As of 2019, the cumulative amount that a Canadian could have contributed to a TFSA is a whopping $63,500.
It is never too late to take advantage of this important investment vehicle. If you are a Canadian citizen living in Canada since 2009 and have never contributed, $63,500 worth of contribution room is waiting for you. Note: When you withdraw money from a TFSA you cannot put it back in. The government tracks contributions. However, it still makes financial sense to grow your downpayment tax-free for as long as necessary.
Despite the confusing name, TFSA is not limited to savings accounts. You can invest in a guaranteed investment certificate (GIC), mutual funds, stocks, etc. For more details, visit the Canada Revenue Agency’s website.
Incentives
First-Time Home Buyers' (FTHB) tax credit
The federal government introduced the FTHB Tax Credit in 2009. It represents a $5,000 non-refundable income tax credit amount on a qualifying home acquired after January 27, 2009. For an eligible individual, the credit will provide up to $750 in federal tax relief. This was designed to assist first-time homebuyers with homebuying costs such as legal fees and land transfer taxes.
Two important qualifications for the FTHB are 1) you or your spouse or common-law partner acquired a qualifying home, and 2) you did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years.
First-Time Home Buyer Incentive
First-time homebuyers who have the minimum down payment for an insured mortgage can apply to finance a portion of their home purchase through a shared equity mortgage with the Government of Canada. This program has numerous criteria; for details, visit https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive.
Choosing the right investment vehicle can help you reduce taxes and save for a downpayment. If you are a first-time buyer, you can also enjoy multiple incentives that potentially save you thousands of dollars.
The trademarks MLS®, Multiple Listing Service® and the associated logos identify professional services rendered by REALTOR® members of CREA to effect the purchase, sale and lease of real estate as part of a cooperative selling system. The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA.
Understanding mortgage insurance, incentives and tax-saving investment vehicles can save you thousands of dollars.
Mortgage Insurance
According to the Canadian Mortgage and Housing Corporation, mortgage loan insurance is typically required by lenders when homebuyers make a downpayment of less than 20% of the purchase price. Insurance fees range from 0.6% to 4.5% and most lenders pass this cost onto the customer. As an example, on a condominium costing $250,000, a downpayment of less than $50,000 would incur insurance adding as much as $10,000 (plus any compound interest) to the cost of the mortgage. According to CMHC, insurance can be paid in a lump sum or added to the mortgage.
Homebuyers can avoid high-ratio mortgages by saving as much as possible for a downpayment and there are investment vehicles and incentives to make this more attainable.
Investment Vehicles
RRSP
When does it make sense to use RRSPs to help fund your downpayment? Typically, it works best for first-time homebuyers.
The RRSP was developed by the federal government to encourage Canadians to save for their retirement. Contributions reduce income tax, often resulting in a tax refund. When people retire and are earning less money, they can withdraw funds at a lower income tax rate. This investment tool can also be beneficial to first-time homebuyers.
Through the Home Buyers' Plan (HBP), first-time homebuyers can withdraw up to $25,000 from their RRSP without paying any tax on the withdrawal. The federal government is proposing to increase the HBP withdrawal amount to $35,000 as of this writing in November 2019.
According to Revenue Canada’s website, homebuyers generally have up to 15 years to repay the HBP amount in annual increments. It can be repaid more quickly, if desired. Repayments to an RRSP through the HBP, do not count toward a person’s RRSP deduction limit, so it is possible to continue making contributions (within one’s limit) even while repaying the HBP.
RRSP Warning: If you withdraw funds from an RRSP to pay a downpayment, but you are not a first-time buyer enrolled in the HBP, your RRSP withdrawal will count as income. That can result in a nasty income tax bill.
TFSA
If you are not a first-time homebuyer, consider saving for your downpayment within a TFSA. Any gains within the TFSA are tax-free. The TFSA contribution amount has varied from $5,000 to $10,000 since being established in 2009. As of 2019, the cumulative amount that a Canadian could have contributed to a TFSA is a whopping $63,500.
It is never too late to take advantage of this important investment vehicle. If you are a Canadian citizen living in Canada since 2009 and have never contributed, $63,500 worth of contribution room is waiting for you. Note: When you withdraw money from a TFSA you cannot put it back in. The government tracks contributions. However, it still makes financial sense to grow your downpayment tax-free for as long as necessary.
Despite the confusing name, TFSA is not limited to savings accounts. You can invest in a guaranteed investment certificate (GIC), mutual funds, stocks, etc. For more details, visit the Canada Revenue Agency’s website.
Incentives
First-Time Home Buyers' (FTHB) tax credit
The federal government introduced the FTHB Tax Credit in 2009. It represents a $5,000 non-refundable income tax credit amount on a qualifying home acquired after January 27, 2009. For an eligible individual, the credit will provide up to $750 in federal tax relief. This was designed to assist first-time homebuyers with homebuying costs such as legal fees and land transfer taxes.
Two important qualifications for the FTHB are 1) you or your spouse or common-law partner acquired a qualifying home, and 2) you did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years.
First-Time Home Buyer Incentive
First-time homebuyers who have the minimum down payment for an insured mortgage can apply to finance a portion of their home purchase through a shared equity mortgage with the Government of Canada. This program has numerous criteria; for details, visit https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive.
Choosing the right investment vehicle can help you reduce taxes and save for a downpayment. If you are a first-time buyer, you can also enjoy multiple incentives that potentially save you thousands of dollars.
The trademarks MLS®, Multiple Listing Service® and the associated logos identify professional services rendered by REALTOR® members of CREA to effect the purchase, sale and lease of real estate as part of a cooperative selling system. The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA.
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