With the recent re-election of the Liberal Government, it will be interesting to see if there are any changes to two programs designed to assist first-time buyers with the cost of purchasing their first home.
Some financial experts have questioned whether the programs achieve the goal of helping young first-time buyers to get into the property market.
We’ve already seen the Liberal Party announce changes to one of the programs, the First-Time Home Buyer Incentive. Critics had said the plan, created this year, was of little use to buyers in high-priced cities like Toronto and Vancouver. In September, the Liberals raised the loan maximums in those cities in recognition of the high prices there.
If you’ve been planning to buy a first home, here’s a brief look at the two plans:
RRSP HOME BUYERS’ PLAN:
This plan allows homebuyers to withdraw funds from Registered Retirement Savings Plans (RRSPs) for their down payments.
The withdrawals are tax-free, but buyers are required to pay back the funds into their RRSP, in equal payments, over a 15-year period.
If you don’t pay the required amount back in a given year, that amount will be added to your income for that year and will be taxed.
For many years, the maximum buyers could withdraw was $25,000 for a single person, or $50,000 for a couple if both withdrew funds. The Liberals increased that amount this year to $35,000 for a single person, or $70,000 for a couple.
If you have funds available in an RRSP, the plan can help you get into the market and start earning equity. Critics have pointed out, however, that many buyers under age 35 don’t typically have thousands of dollars set aside in an RRSP.
Note that it is not limited to those who have never owned a home.
Those who have not owned a property (that was their main residence) in the last 4 calendar years … are also eligible.
To help couples who have been through a separation, the plan will expand in 2020 to buyers who have separated but want to buy again on their own.
THE FIRST-TIME HOME BUYER INCENTIVE:
Announced by the Liberal Government early this year, this program provides interest-free loans to first-time buyers, reducing mortgage payments.
The Canada Mortgage and Housing Corp. (CMHC), which administers the program, receives an equivalent equity stake in the home.
Eligible buyers qualify for loans worth up to 5% of the price of a resale home and up to 10% of the price of a newly constructed home.
The plan is open to first-time buyers who have a household income of not more than $120,000 and who have come up with at least a 5% down payment. Your total mortgage would be limited to four times your qualifying income. The maximum sale price would be in the $500,000 to $600,000 range.
In one example provided by the Government, the buyer of a newly built $400,000 house, with a 5% down payment, could receive an additional loan of as much as $40,000, reducing mortgage payments by $228 a month.
Repayment is required after 25 years or if the house is sold, whichever comes earlier.
Although the loan is “interest free,” you share any gain in property value when you repay. If you received a loan of 10 % on a $400,000 home ($40,000), and your house increases in value to $500,000 at the time of repayment, you will pay 10% of $500,000, or $50,000. If the value declines (extremely unlikely after 25 years), you pay 10% of the lower value.
Mortgage brokers and finance experts doubt many buyers will warm to the idea of sharing the equity in a home with the government. In British Columbia, a similar provincial program attracted a fraction of the expected number of participants.
It will be interesting to see how many Canadians apply, and if the Liberals make any changes to the program as a result.
You can read more about the plan on the website of the CMHC.
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