Home prices are finally starting to come down throughout BC, largely due to interest rate rises.
And assuming we see another couple of years of rate rises, we should see prices recede accordingly to a level that is hopefully sane once again.
That means that for younger couples without a home today, starting now to grow a big down payment now is a great idea. As there are now 3 helpful government programs available, saving a sizable down payment may be within your reach. Hopefully, by the time you’ve done that, prices will have receded to the point where it makes sense to buy, and you’ll be able to step in at an opportune time.
Let’s have a look at the three different programs, which you might consider for augmenting your down payment.
1. The Home Buyers Plan
The Home Buyers Plan can help BC first-time buyers reduce the size of their mortgage and thus reduce their mortgage payments. It lets first-time homebuyers borrow up to $35,000 from their RSPs tax-free. Note: You have to put the money back into the RSP within 15 years, starting in the second year after the money is withdrawn for a down payment, or the money is considered taxable income.
There are some caveats to the program, such as the limitations on pulling money out, and funds must have been deposited more than 90 days before the withdrawal.
Remember though, using money from an RRSP means reducing your retirement savings. So that’s something to consider. That said, if you’re young and have some savings, it’s very often in an RSP. So this is a viable way of accessing the money without tax in order to be able to create your deposit.
2. The First Time Home Buyer Incentive
Another program is called the First Time Home Buyer Incentive. It helps buyers reduce their monthly payments without the burden of having to pay back an RRSP like the Home Buyers Plan.
Using this program, First Time Home Buyers can apply to receive either 5% or 10% of the home’s value, based on whether it’s an existing or newly built home, from the Canadian government to increase their down payment.
This allows you to borrow less money on the mortgage, thus, lowering your monthly payments. However, the government wants the money back eventually. So, they look for an increased value back later on – either in 25 years or when you sell the home.
Consider a home worth 500,000. If you use the First Time Home Buyers Incentive plan to add 5% (because it’s an existing house) to your down payment, you’ll receive $25,000.
You’ll need to pay back 5% of the home price to the government when you sell it. So if you sell the house for $700,000, instead of paying back the original $25,000, you’d pay back $35,000. Of course while that might have cost you an extra $10,000, the home did appreciate by $200,000.
There are slightly different eligibility requirements depending on where the home is. If you live in Vancouver or Victoria Metropolitan areas, you’re only eligible if your household income is $150,000 or less, and your total mortgage is not more than 4.5 times your income. For other areas of the province, qualifying income is $120,000 or less and your mortgage can’t exceed 4 times your income. That said, this is a viable program to get a down payment now and pay it back based on the value of your home down the road.
Note that in June of this year CMHC changed the rules, slightly capping the amount the government shares in the appreciation or depreciation of a home to 8% each year.
3. Lastly, there’s the Home Savings Account
Coming in 2023 is the federal government’s own First Home Savings Account. It’s a registered account like an RRSP that allows first-time buyers to save up to $8,000 a year to a total of $40,000 and put it towards purchasing a home.
It acts like an RSP and a TFSA in some ways, so the contributions are tax deductible like an RSP and the growth is tax-free. When withdrawn like a TFSA, the money has to be used to purchase a home otherwise the money’s transferred into an RRSP and becomes taxable at the time of a withdrawal.
The upshot of this appears to be that the government really is trying to help Canadians get into their own first-time homes. While we appreciate these efforts which are significant, there still tends to be a significant amount of work that needs to be done with regard to providing affordable housing through things, such as RTMs and tiny homes as we’ve discussed in our previous article.
Rounding off these options along with the existing programs will show real effort in the area which we hope will happen over the course of the next few years.
If we can help you with some of your planning decisions, please give us a call. We’re here to help.