The Home Buyers' Plan (HBP) is a program that allows you to withdraw some of your Registered Retirement Savings Plan (RRSP) tax-free to use towards the purchase of a home. Even if you are aware of the program, there may be some things about it that you do not know.
Home Buyers' Plan - How It Works
The program allows you to pull out up to $25,000 of RRSP's per person to be used towards a primary residence purchase. If you are a couple and you both qualify to use it, your max would be $50,000 if you each have $25,000 invested. As long as you meet the program guidelines for eligibility and withdrawals, you can do this without being taxed on the money you pull out. And, of course, the investment you have your RRSP in must also be cashable. It is possible one person in a couple will qualify to use the program and the other will not. You then pay the amount you pull out back 1/15 per year over 15 years. If you ever miss a repayment, that payment is considered income in that year and Canada Revenue Agency (CRA) will require you to pay taxes on it.
- Moving In With Someone Could Take Away Your Eligibility To Use The HBP - The elibility guidelines state that you are considered a first-time home buyer and can use the program "if, in the four-year period (defined specifically by CRA; see their definition to determine your exact timeline), you did not occupy a home that you or your current spouse or common law partner owned." In other words, if you move in with your girlfriend or boyfriend into a property they own and live with them for a year, this could prevent you from using the program until you are outside the four-year period, which is actually 4 - 5 years depending on the timing.
- You Can Use the HBP If You Previously Owned Or If You Have Only Owned An Investment Property - If you previously used the program, that does not prevent you from using it again. Your previous account has to be paid to zero in January of the year you plan to withdraw again. You must also meet the same first-time home buyer requirement of not having lived in a property you or your spouse or common law partner owned for the CRA definition of the four-year period prior to your purchase. You can also use the program for the first time even though you previously purchased an investment property, as long as you meet these same requirements now.
- It Can Be Used For Things Other Than Down Payment - The program states that the funds go towards the purchase or build of an eligible property. But, it can be used for things other than down payment related to a home purchase. For example, you can use it to help pay legal fees or closing costs on a purchase.
It is the individual withdrawing their RRSP funds who is responsible for confirming their eligibility to use the program, so you should not rely upon anyone except CRA regarding your eligibility. You can click here to review the rules and guidelines carefully:
You can also call CRA to clarify or ask questions. If you do not meet the guidelines and pull that money out, you could face an unexpected tax bill when you file your taxes.
Courtesty of Michelle Lapierre, Mortgage Broker with Mortgage Tailors
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Article Courtesy of Michelle Lapierre, Mortage Broker with Mortgage Tailors
This is a heads up to buyers and the Realtors who assist them! A couple of weeks ago we got to see an unintended consequence of the mortgage rule changes that now require a stress test on insured mortgages. Buyers with less than 20% down need to qualify at the Bank of Canada Benchmark Rate, not the lower contract rate they are actually getting.
The stress test has been in effect since last October. But, two weeks ago the Bank of Canada Benchmark Rate moved up for the first time since these new rules rolled out, increasing from 4.64% to 4.84%. It left banks and other mortgage lenders scrambling as they realized that any pre-approved clients immediately had a drop in their maximum purchase price. It was a small change but for those shopping at their maximum it can be the difference between a lender approval or a decline.
Your Rate Can Be Held, the Bank Of Canada Benchmark Rate Cannot
The requirement for buyers to qualify at the Bank of Canada Benchmark Rate is triggered when a mortgage is submitted to the insurer for approval once they have an offer on a property. A buyer can hold their contract rate by doing a pre-approval with a lender, but this does not protect them if the Bank of Canada Benchmark Rate moves up. They will still have to qualify at the current Bank of Canada Benchmark Rate when they actually write an offer. If the Bank of Canada Benchmark Rate moves up while a pre-approved client is out shopping, their maximum mortgage amount will drop.
So How Do We Pre-Approve People Now?
Pre-approvals were never guaranteed. The have always been subject to lender and insurer approval when an offer was actually written. This just adds another variable that can impact that final mortgage approval.
My approach to pre-approvals is educating buyers on how a maximum purchase price is calculated and providing them with the assumptions that go into their maximum purchase calculation. When I pre-approve clients, they will be given a list of the variables or assumptions that go into their maximum purchase calculation. These include condo fees, property tax amount, the current Bank of Canada Benchmark Rate, and heating costs. These assumptions should be shared with the buyer's Realtor. If any of these variables change while they are out shopping, it is important for them to revisit their maximum purchase, particularly for those buying near their maximum.
What Should Buyers Do?
Buyers can prevent failed financing attempts by working with a mortgage broker or lender who will help you understand how mortgage qualification works and the variables that go into their approval. Once pre-approved and out shopping, remain in contact and if properties you are looking at no longer line up with the parameters when you first did your pre-approval, it is time to call your lender and confirm that you still meet qualification guidelines.
Buyers should also protect themselves by writing any offer on a property subject to satisfactory financing so you can confirm a lender and insurer will approve your mortgage before your deposit is on the line.
Where Does The Bank Of Canada Benchmark Rate Come From?
The Bank of Canada Benchmark Rate has become key in lending, but where does it come from? It is currently 4.84%. Each week the Bank of Canada polls the big banks in Canada on their current 5 year fixed posted mortgage rate. The Bank of Canada Qualifying Rate is the average of those numbers. As mortgage rates move up, so will the Bank of Canada Qualifying Rate. It is identified as the Conventional mortgage - 5-year on the Bank of Canadas Daily Digest:
Bank of Canada Daily Digest August 11
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The Bank of Canada has raised its key interest rate as expected to 0.75 per cent — the central bank's first move upward in the cost of borrowing in seven years.
The bank's target for the overnight rate — at which major financial institutions make one-day loans to each other — moved up by one-quarter of a percentage point from 0.50 per cent.
In a statement accompanying the rate decision, the central bank said the Canadian economy has been robust, fuelled by household spending.
"As a result, a significant amount of economic slack has been absorbed," the bank said, adding that the remaining slack is expected to be gone around the end of this year, which is earlier than the bank anticipated in its April Monetary Policy Report.
The move means consumers will likely pay more for borrowing such as variable-rate mortgages and lines of credit.
The interest rate increase had been widely expected after senior Bank of Canada officials signalled in speeches and interviews over the past weeks that lower rates had done their job, and the Canadian economy was performing well.
The Bank of Canada hadn't increased the overnight rate since August 2010, when it nudged it up to one per cent. After Stephen Poloz took over as governor of the bank, the rate was lowered twice in 2015 to 0.5, where it remained until Wednesday.
Poloz and senior deputy governor Carolyn Wilkins will hold a media conference at 11:15 a.m. ET today to discuss the decision and outlook.
With the economy performing well, the bank has also nudged up its forecast for growth this year. The bank said real gross domestic product (GDP) is now expected to grow by 2. 8 per cent in 2017, up from the April outlook of 2.6 per cent.
The central bank said growth is expected to moderate over the next two years, coming in at two per cent in 2018 and 1.6 per cent in 2019.
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How To Prepare For Your Home Purchase
Recent mortgage rule changes have had a significant impact on a purchasers' buying power. More than ever, planning ahead for your purchase can impact your mortgage qualification. Knowing what mortgage lenders look for can help you to maximize your purchasing power.
Understanding Your Maximum Purchase Calculation (GDS/TDS)
All mortgage lenders and insurers look at affordability ratios when reviewing your mortgage application. There is some flexibility on conventional mortgages (20% or more down payment), but insured mortgages must meet specific maximum affordability ratios. First, your Gross Debt Service (GDS) or the amount of your gross monthly income spent on your monthly housing costs, must be less than 39%. Housing costs include your mortgage payment (calculated at Bank of Canada qualifying rate; currently 4.64%), heating cost (varies by lender but $100/month is common), property taxes, and 50% of condo fees.
Secondly, your Total Debt Service (TDS) must be less than 44%. Your TDS is the amount of your gross income or the amount of your gross monthly income spent on your monthly housing costs plus your debt and other financial commitments. This would include car payments, student loans, credit cards, lines of credit, and the carrying costs of other properties you own.
Preparing for Your Purchase
- Pay Down Debt - Not only is carrying debt into home ownership difficult for future pay off, but it can also reduce your buying power. If adding your debts to your monthly housing costs tips you over 44% of your income, it lowers how much house you can purchase.
- Buy Less Vehicle - Vehicle payments are often the biggest barrier to buying a home simply because they can eat up such a significant amount of your monthly income. These payments factor into your TDS, so the higher your vehicle loan payment, the more likely it is to drag down your maximum purchase price.
- Build and Maintain Healthy Credit - An underwriter once told me that they would rather see a spotty credit history than no history. When I asked why that was, he told me, "I don't like playing the lottery." With a good credit score and an established credit history, you qualify for the highest allowed GDS/TDS ratios and are most likely to get a lender on board when buying at your maximum.
- More Down Payment - Whether saved or gifted, increasing your down payment allows you to qualify for a higher purchase price. If you are able to hit 20% down payment, it has even more impact as lenders have more flexibility once they do not need to follow insurer requirements. You can qualify using your contract rate (the actual mortgage rate you get) instead of the Bank of Canada Qualifying Rate, as well as a 30-year versus 25-year amortization.
Michelle Lapierre, BComm
VERICO Mortgage Tailors Inc.
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Most people shop for mortgages looking only at the interest rate. While that is important, term selection is actually the key to saving you the most money. There is no point fighting for a 2.64% vs. 2.69% 5-year fixed rate to save $700 over 5 years, but then turning around and paying $10,000 in breakage penalties when you sell it in 3 years. One of the best ways to save money on your mortgage is avoiding breakage penalties. You do this by aligning your mortgage product and term to the ownership horizon of your property.
Penalties - Why Term Selection Is So Important
Prepayment penalties would not matter if they were small and no one ever paid off mortgages early, but they can be huge! Depending on your mortgage size and how early you are paying it off, the penalty can amount to tens of thousands of dollars. You may think you have no intention of paying off your mortgage early, but things can change. You may need to sell due to a growing family, divorce, or death in the family. Or you may simply want to refinance to get a lower rate. Any of these things can result in you paying a prepayment penalty.
Most closed fixed-rate mortgages have a prepayment penalty of 3 months interest or the Interest Rate Differential (IRD) charge, whichever is HIGHER. To calculate the IRD, the bank subtracts the mortgage rate you originally agreed to pay from the rate it can charge today, and then multiplies that by the current balance of your mortgage and time remaining to your mortgage maturity or renewal. Generally, non-bank lenders charge lower penalties than the big banks in Canada but they can still be hefty.
A variable rate mortgage has a prepayment penalty of 3 months interest, a far smaller penalty than most IRDs today.
Dont Limit Yourself To A 5-Year Fixed
The 5 year fixed is great...if you actually plan to be in your home for 5 years. If you do not know how long you will own it or believe it will be a shorter time, consider a shorter-term fixed rate mortgage. For example, you could get a 1, 2, 3, or 4-year term. For even more flexibility of exit, consider a variable-rate mortgage because of its lower penalty.
Portability is a feature that allows you to move your mortgage to a new property to avoid or be credited back for a breakage penalty. It is an important feature because it can protect you from a significant cost. BUT keep in mind each lender has different policies and restrictions on their portability. Some do not offer portability at all (often value or discount mortgage rates). Lenders also differ in how much time can be between the sale and purchase to use portability, and have different rules about the rates and options available to you on any new mortgage funds you need over and above the current balance you are porting. So even if you have a portable mortgage, you may find you are not able to actually use the feature. Term selection still matters!
As widely predicted, the Bank of Canada announced today that it is holding the key rate steady. While noting that “economic growth has been faster than expected”, the bank said it’s too early to determine if the economy is on a “sustainable growth path”, citing weakness in export growth, business investment and employment. The Bank’s three measures of core inflation, taken together, continue to point to material excess capacity in the economy. While there have been recent gains in employment, little growth in wages and hours worked continue to reflect economic slack in Canada, in contrast to the United States.
The bank also took into account uncertainties that include the potential impact of U.S. trade policies. The next rate-setting day is May 24.
This announcement means there should be no change to the prime rate. Great news if you have a variable-rate mortgage or line of credit, need a new mortgage, are renewing, or want to save thousands by consolidating debt at the lowest-cost funds. Or perhaps you are thinking of using home equity to invest in a rental property or second home, or cost effectively complete renovations.
Although going through the pre-approval process is important, the actual term ‘pre-approval’ is often misunderstood.
An important point to be clear on is that while you may be pre-approved for a certain mortgage amount, there are several variables that can derail a final approval once you write an offer on a property. As such it is imperative that offers include a condition (or ‘subject’) clause along the lines of ‘subject to receiving and approving satisfactory financing’.
This is arguably the single most important clause in a contract (an inspection being a close second), because without the financing, how will you complete your purchase?
The pre-approval process should be considered more of a personal pre-screening process than anything. It should include a lender review of a current credit report and review of all required income and down payment documents. You should have a clear understanding of the maximum mortgage amount you qualify for along with clarity on the various related costs involved in your specific transaction.
With most lenders pre-approvals involve no formal live review of documents, but your Mortgage Broker can preview them to catch any significant areas of concern such as:
- Unpaid taxes
- Employment still in a probationary period
- Clarity around down payment origins
Ultimately the property forms a significant part of a mortgage approval, and so until an offer is written on a specific property, no true approval can be offered.
Furthermore, government changes to lending guidelines and policies can render a pre-approval invalid just a few days later, without warning. Pre-Approvals are not always grandfathered when the lending rules change.
So yes, request a pre-approval, as it gives you a good idea as to your maximum mortgage amount and locks down a rate for you. Always a worthwhile endeavour. It may also allow you to address a few smaller issues with ample time prior to writing your offer. Small issues today can be big issues when in the middle of a live transaction.
Bottom line, please be aware that aside from these key advantages, a pre-approval is not a guarantee of mortgage financing.
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Today’s Bank of Canada rate hold announcement marks almost four straight years that the key benchmark rate has remained unchanged, since September 8, 2010. Great news if you have a variable-rate mortgage or home equity line of credit; the prime rate stays at 3%.
The announcement noted that “the risks to the outlook for inflation remain roughly balanced, while the risks associated with household imbalances have not diminished.” With these considerations, the Bank is maintaining its monetary policy stimulus, and remains neutral with respect to the timing and direction of the next change.
The next rate-setting day is October 22nd.