Chapter 4

How to Afford Your First Home

Finding the money to buy your first home can be a challenge. If you’ve read Chapter 3 of this guide, you’ll know the total costs of buying a new home go well beyond the down payment: from legal fees to land transfer taxes, you’ll need to have a significant amount of money on hand to close the deal.

In this chapter, we’ll go over your options for putting together a down payment, and list all the rebates and tax credits you may be eligible to receive as a first-time Toronto home buyer.

Savings

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Saving for a house may be old-school, but it works. In 2016, a survey by Mortgage Professionals Canada found that 49 percent of first-time home buyers rely on their savings for a down payment.

If you can develop the discipline to spend less money than you make, you can save enough money for a solid down payment and closing costs. It’s low-tech, uncomplicated and risk-free, and it’s your best bet.

There are countless books, websites, blogs and apps that can help you learn to save money. We’ve listed some resources below to get you started. Also, do some research online or at your local library or bookstore. If you know someone who lives a frugal lifestyle, ask for their tips.

Books

Websites

Apps

Gifts

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First-time home buyers in Toronto’s hot, expensive market will often need help coming up with money for a down payment, and increasingly they are turning to family for monetary gifts. According to According to Mortgage Professionals Canada, gifts from parents have increased sharply in recent years. In 2000, about 7 percent of first-time buyers used gifted money for their down payment, while in 2014-16, 18 percent did so.

The rules are simple. You must be using the gift as a down payment on a home with no more than four units, and you must have a gift letter (your bank can supply a template) that states the money is a true gift and that you will not be required to repay it.

You will also need bank statements that show the money came from your relative’s account and was deposited into your account at least 15 days prior to closing. The documents must show both the account numbers and the names on the account. Some banks will verify all of this verbally; check with your lender.

Borrowed down payment

In some cases, you can take out a personal loan and put that money toward a down payment. This is called a borrowed down payment and according to Mortgage Professionals Canada, 26 percent of first-time home buyers took out a loan to finance some or all of their down payment.

Borrowing your down payment can help you get into the housing market sooner. If you already have some money set aside, adding money from a loan could get you a lower interest rate on your mortgage (buyers with a bigger down payment can sometimes secure a lower interest rate). A bigger down payment may also help you avoid a high-ratio mortgage, and therefore save you the hefty mortgage default insurance premiums.

On the down side, you will owe more money, and your disposable income will be lower. You are likely to pay significantly higher interest rates on an unsecured personal loan. You’ll also have little or no equity in the property, leaving you vulnerable: if for some reason you were forced to sell, you might owe money after the sale.

|How do borrowed down payments work?

The important thing to note about this type of down payment option is that the loan payments will be taken into account when the lender decides how much money to loan you when you apply for a mortgage. We will go into much more detail about mortgage pre-approvals in Chapter 5.

For now, you only need to know that the lender will look at two main things in deciding how much to loan you for a mortgage: how much you make each year (before taxes), and how much you’ll be paying for certain housing costs and debt payments. The technical term for this is Gross Debt Service ratio (GDS). For more detail about GDS, turn to Chapter 5.

Your GDS can only be roughly 33 percent of your gross income (the actual percentage depends on the type of mortgage). The more debt you have, the lower the amount available for housing.

For example, if your gross income is $100,000 per year, you can only spend $33,000 per year on certain housing and debt payments (33 percent). If you have no debt, your monthly housing costs can be as high as $2,750. If you have $1,000 in debt payments every month, your monthly housing costs can only go as high as $1,750. That’s a big difference, and it will be reflected in the size of mortgage the bank will give you.

Here’s what it boils down to: if you borrow your down payment, you will probably qualify for a much smaller mortgage. This is fine if you’re hoping to purchase a relatively inexpensive home, or if you have a very high income. But this option can leave you highly leveraged and financially vulnerable, and for most first-time home buyers we do not recommend it.

RRSP Home Buyer’s Plan

Under the federal government’s Home Buyer’s Plan, eligible home buyers can borrow their down payment from their own Registered Retirement Savings Plan (RRSP) without paying the financial penalties usually attached to early RRSP withdrawals. In 2016, eight percent of first-time home buyers used this option for their down payment, according to Mortgage Professionals Canada.

This plan can be useful for disciplined would-be home buyers. You will not pay income tax on your RRSP contributions (benefit one). As a result, you will probably get a tax refund, and you can put that into savings for a down payment as well (benefit two). The money will grow tax-free while you are saving up your down payment (benefit three).

When you’re ready, you and your partner can each take up to $25,000 out of your RRSP to put toward a down payment on your first home. (The money must be in the RRSP for 90 days before you make the withdrawal). Two years after you withdraw the money, you must begin paying yourself back by making new contributions to your RRSP. You can do this over 15 years, which makes repayment more manageable. You pay no early withdrawal penalties and no interest.

On the down side, you will not be able to benefit from tax-sheltered growth until you replenish your RRSP.

To qualify for the Home Buyer’s Plan, you must be what the government considers a “first-time home buyer”—but somewhat confusingly, that doesn’t mean you must never have owned a property before. But if you owned a house in the past, you must wait nearly four years until you are eligible to use the plan again. The calculation is complex: check with your lawyer to see if you qualify, or read the federal government’s explanation here.

Rebates, tax credits and other incentives

As a first-time homebuyer, you may have access to several government programs designed to help you get into the real estate market. Some of these options have been covered in other chapters, but we’ve collected them here so you can see all of your options in one place.

|Home Buyer’s Tax Credit

The first-time Home Buyer’s Tax Credit allows you to claim $5,000 for the purchase of a qualifying home. This tax credit is calculated by multiplying the lowest personal income tax rate for the year (15 percent in 2016) by $5,000. For 2018, the credit will be $750. You only qualify for this rebate if you “did not live in another home owned by you, your spouse or common-law partner in the year of acquisition or any of the four preceding years,” according to the federal government’s website on the credit.

|Municipal Land Transfer Tax (MLTT) Rebate

Since you’re buying in Toronto, you’ll pay a Municipal Land Transfer Tax of between 0.5 percent and 2.5 percent, depending on the cost of the property. As a first-time home buyer, you’re eligible for a municipal tax rebate as high as $4,475, depending on the purchase price of your home and other factors. To qualify for this rebate, you cannot have owned a home anywhere in the world, ever. Read more about the Municipal Land Transfer Tax and the rebate in Chapter 3 under closing costs.

|Provincial Land Transfer Tax (PLTT) Rebate

Since you’re buying in Ontario, you’ll pay a Provincial Land Transfer tax of between 0.5 percent and 2.5 percent, depending on the cost of the property. As a first-time home buyer, you’re eligible for a provincial tax rebate of up to $4,000. To qualify for this rebate, you cannot have owned a home anywhere in the world, ever. Read more about the Provincial Land Transfer Tax and the rebate in Chapter 3 under closing costs.

|HST New Housing Rebate

Resale homes are exempt from Ontario’s Harmonized Sales Tax (HST). If you buy a new home, however, you will pay Ontario’s 13 percent HST. The HST is a combination of two taxes: an eight percent provincial sales tax, and a five per cent federal goods and services tax.

All buyers (including first-time buyers) may qualify for two separate HST rebates, one from each level of government.

The federal rebate is equal to 36 percent of the federal portion of the HST, to a maximum of $6,300.

The Ontario provincial rebate is equal to 75 percent of the provincial portion of the HST, to a maximum of $24,000.

|CMHC Green Home Program

The Canada Mortgage and Housing Commission (CMHC) has a Green Home Program that provides a significant rebate if you buy, build or renovate a home that is energy efficient. The rebate only applies to those who have a high-ratio mortgage and who are therefore required by law to purchase mortgage default insurance. Read more about default insurance in Chapter 3.

To qualify, you must purchase a home that meets certain energy efficiency criteria (such as EnergyStar or Built Green Canada standards). Depending on the level of energy efficiency, you can get a premium rebate of up to 25 percent. Given premiums can reach over $20,000 in some cases, this could be an important benefit for home buyers.