For young people who dream of buying their first home, one of the biggest challenges is raising the thousands of dollars they need for that down payment.
As a Realtor in Ottawa for more than three decades, I’ve met many young people who tell me they want to buy, but even after saving carefully, they remain perhaps $5,000 or 10,000 short of what they need. Not everyone is lucky enough to have parents or other relatives who are able to provide those down payment funds for them.
In Canada, buyers have to come up with a minimum 5 per cent down payment for an insured mortgage on any property they want to buy.
In the Ottawa area in June of 2019, the average sale price of a condominium unit was a little over $300,000. The average price of a residential property that month was about $500,000.
While buyers are fortunate in our city that these prices are much lower than in Toronto or Vancouver, it still means you need a minimum down payment of $15,000 for an average-priced condo or $25,000 for a residential home.
This is where the federal government’s Home Buyers’ Plan (HBP) can be helpful. Since it was created in 1992 to help Canadians build up the funds they need for this major purchase, the HBP program has helped thousands of Canadians.
The program allows qualified buyers to borrow from their Registered Retirement Savings Plan (RRSP) funds without having to pay the usual taxes that would apply to such withdrawals, as long as the amount is paid back over time.
If you qualify, you can access the funds to bring your down payment to where you need it, and be able to buy now rather than putting funds aside for a few more years.
If you missed the news earlier this year, the program has increased the amount you can withdraw. For more than 10 years, the maximum a single person could withdraw from the program was $25,000 (or $50,000 for a couple if both are making withdrawals).
Last March, in recognition of the high prices in certain cities, the government announced it was increasing the limit to $35,000 per person, or $70,000 per couple.
In my experience, many buyers don’t necessarily need to withdraw the maximum amount, but use the plan to borrow whatever they need top up their down payment just enough to get the home they want and get into the market sooner rather than later.
Only you can decide if using the program makes financial sense in your case. But many of my clients have used the program successfully and are happy to finally stop renting.
Keep in mind that the amount you borrow has to be paid back over 15 years, though it can be paid sooner if you have the funds available.
If you borrow $15,000, for example, you would be required to pay back a minimum of $1,000 each year, over 15 years. So you would have to budget for that cost, along with your other mortgage and housing expenses, in coming years.
The plan allows some breathing room for new owners who use it. You only have to start re-paying the funds in the second calendar year after the withdrawal. If you were to borrow the funds to buy a property in 2020, for example, you wouldn’t have to start paying it back until 2022.
If you do not re-pay the full amount that is required in any given year, you would owe tax on the amount you do not pay back that year. If you are required to pay pack $950 a year, for example, and you only manage $300 one year, the remaining $650 would be added to your income for that year and you would be taxed.
If you are able to re-pay the funds sooner than the required 15 years, you are permitted to do so. That’s obviously to your advantage as well, as your RRSP funds will be able to start growing sooner.
Keep in mind, as well, that when you make the required payment of say, $950 each year, you will not receive the tax benefit on that $950 that you would with a regular RRSP contribution. That’s because you received the tax benefit when you first contributed, and you are now simply re-paying an amount you borrowed.
However, if you are making more than the required payment in a given year, the amount beyond the required minimum can qualify for the benefit. You can declare on your tax forms how much is being repaid into the HBP program.
While the plan is intended for first-time buyers, it is not restricted to those who have never before owned a home.
You can qualify as long as you have not owned a property that was your main residence in the four calendar years before buying. The government also announced that after 2019, the plan will extend to couples who have owned a home but have separated and want to buy again.
Many of my clients have taken advantage of the Home Buyers’ Plan, and have credited the program with helping them get into the market immediately rather than waiting to put aside more money. After all, the sooner you can buy, the sooner you can start to see appreciation on your investment.
To decide if the Home Buyers’ Plan makes sense for you, you can read about the Plan and how it works, at the Government of Canada website, at www.cra-arc.gc.ca/hbp
The site explains who qualifies for the program, how to withdraw funds and how the funds have to be repaid.
If you’re interested in buying or selling property in the Ottawa area, I’d love to chat with you about the current market and conditions in your neighbourhood. You can read about me and my team at www.nancybenson.com, where you can also view my current listings. Feel free to give me a call, at 613-747-4747.