If you feel the dream of owning of home seems to drift further and further away, you are not alone. Between paying the rent, buying groceries, and your social obligations, it’s no easy task save for a down payment. In recently years, home price appreciation has outstripped income growth, meaning as a First Time Home Buyer (FTHB), the longer you wait, the harder it is to get into the market. Fortunately, First Time Home Buyers can save tens of thousands of dollars using Government Incentives.
So, what government are programs available for First Time Home Buyers?
Fortunately, there are many government programs that are designed to help make home ownership more within the reach of First Time Home Buyers. These programs aim to help you with both your down payment, and your monthly cash flow. Here’s a summary:
|Government Programs||Canada’s First Time Home Buyer Incentive||Land Transfer Tax Rebate||Home Buyer’s Plan (HBP)|
|What is it?||Interest-free Equity Mortgage||Refund on Tax Payable to the Province and the City||Tax-free RRSP withdrawal|
|How does it help you?||It helps with your down payment and on-going cash flow||It reduces closing costs||It helps you with your down payment by making it tax-free|
Although all three programs aim to help First Time Home Buyers, the definition of a First Time Home Buyer is different for each program. And so is the eligibility criteria. Let’s look at how you use those programs to super charge your first home purchase.
Interest-free Shared-Equity Mortgage – Canada’s First Time Home Buyers Incentive
Canada’s First Time Home Buyer Incentive launched in 2019. Canada Mortgage and House Corporation (CMHC) administers the programme. The programme provides an incentive to FTHBs in the form of an interest-free equity mortgage as a % of your home purchase price. The government is essentially co-investing together with you when you purchase your home. This means:
- You pay NO interest on the funds you receive from this program.
- When you sell the house or at the end of the amortization period, the government receive its share back. The governments share of the value of your home in proportion to its initial funding.
- Another key advantage is that because the government comes in as a an “equity” mortgage, it is not considered an liability when you qualify for your mortgage. The money provided by the governement is excluded from the debt servicing ratio calculations. It will not impact how much mortgage you qualify with your lender.
Who is eligible for the First Time Home Buyer Incentive?
- You are considered a First Time Home Buyer for this incentive if you have NEVER purchased a home before, AND you didn’t live in a home owned by your spouse in the past four years.
- Your annual income is less than $120,000
- The total mortgage amount, including the incentive, on your home is no more than 4 x of your income.
- You still need to meet the minimum down payment requirements with your own savings. The minimum down payment required is 5% for homes less than $500,000. 10% for the amount above $500,000, and 20% for homes worth more than $1,000,000.
- And you are a permanent resident of Canada.
How much can I qualify for?
- You can qualify for up to 5% of the purchase price when you purchase an existing home
- Or, you can qualify for up to 10% of the purchase price if you purchase a newly constructed home
How can I repay the First Time Home Buyer Incentive?
The incentive must be repaid in lump sum when you sell your home or at the end of the 25 year amortization period. You cannot make partial payments towards the home equity mortgage.
In some cases you may want to repay the incentive earlier. If the property market is doing extremely well and you have enough cash to pay out the entire amount, it’s good to “buy the government out” so the entire appreciation after the buy out belongs to you. To do an early payout, you will have to order a fair market value appraisal, which may cost about $400.
Now let’s go through an example:
- You purchased a home at $600,000
- It was a new construction when you purchased it
- 10 years later, you sold the home for $800,000
It works like this:
- You would receive an interest-free equity mortgage for $60,000 at the time of purchase, which equals to 10% of the purchase price.
- You will pay no interest on this mortgage during the 10 years you owned the home.
- When you sell it after 10 years, you need to pay the government $80,000, which is 10% of the sale price. It includes the $60,000 original principle plus $20,000 appreciation.
- If the home depreciated after 10 years, the government shares it proportionately as well.
- If you choose to pay out the government at year 5 instead, you have to order an appraisal. Let’s say the house is appraised at $700,000 at year five, the total amount you need to repay should be $70,000 at that time to “buy back” the 10% interest from the government.
Land Transfer Tax Rebate
It’s also called the First Time Home Buyer Rebate. It’s a refund of part or all of your Land Transfer Tax when you purchase your first home.
Who is eligible for the First Time Home Buyer Rebate?
- To be considered a First Time Home Buyer for Land Transfer Tax Rebate, you must have NEVER owned a home before. It means you can only qualify for the rebate once.
- The property you are purchasing must be your primary residence. it cannot be a rental property.
- You have to move into the property within 9 months after the title of the property has been transferred to you, which usually happens on the closing date.
How much is the Land Transfer Tax Rebate?
For the Province of Ontario, the rebate is up to $4,000 on a home purchase. The Land Transfer Tax Rebate for Toronto is up to $4,475.
If you are buying a property together with your spouse, and your spouse owned a home before, you can still claim a refund up to the maximum amount as long as your spouse didn’t own a home after you are together.
When will I receive the Land Transfer Tax Rebate?
At the time of closing, your lawyer usually applies for the rebate on your behalf. Therefore, it will reduce your Land Transfer Tax owning at closing. If your Land Transfer Tax is less than the maximum rebate amount, it reduces to zero.
Try our Land Transfer Calculator to see how much you can save through the land transfer tax rabate.
Tax Free RRSP Withdraw – Home Buyer’s Plan (HBP)
If you are purchasing your first home, the HBP program allows you to withdraw money from your RRSP without incur withholding tax.
Who’s eligible for the Home Buyer’s Plan?
- CRA’s definition for First Time Home Buyer is someone who “in the four year period (prior to a home purchase), did not occupy a home that you owned, or one that your current spouse or common-law partner owned”. For example, even if you owned a home four years ago, if you have been renting for the past four years before your most current home purchase, you will still be eligible for this program.
- The closing date of your home purchase must be before October 1st of the year after you withdrew the funds from RRSP.
- You must be a resident of Canada at the time of the RRSP withdrawal.
- If you have participated in the Home Buyer’s Plan before, you have to pay down the HBP balance to zero before you can participate again.
How much can I withdraw from my RRSP tax-free?
You can withdraw up to $35,000 from your RRSP tax-free per purchaser. You can also withdraw the funds from more than one RRSP account. If you are buying a property with your spouse, you can both take advantage of this program if you are eligible to make the combined limit $70,000.
You can of course withdraw more than the HBP limit for your home purchase, but you should be aware of the consequences. Any withdraw above the $35,000 HBP limit per person is subject to the RRSP withholding tax, which is approximately 30%. You will also lose the contribution room that’s equivalent to the amount of RRSP withdraw above and beyond the HBP limit.
How can I repay the Home Buyer’s Plan?
You have up to 15 years to reply the amount you withdrew from the program. The program has a two year grace period, i.e. you don’t have to start paying it back until two years after your withdrawal.
Required Annual Amount is outlined on your Home Buyer’s Plan statement of account. You will receive the statement from CRA each year together with your Notice of Assessment. It’s usually equal to the total amount of withdrawal divided by 15 years of repayment period. You can choose to pay more of less than the Required Annual Amount, but you still have to pay back all the HBP balance by the end of the 15th year. The repayment also doesn’t reduce your RRSP contribution room.
To Sum it Up
You may already have been doing the math as you are reading about these programs, yes, the savings do add up. If you are purchasing a home at $1 million dollars, by participating in Canada’s First Time Home Buyer Incentive, you can get up to $100,000 interest free equity loan as part of your down payment. You will also get up to $8,475 Land Transfer Tax Rebate. Last but not least, if you have withdrawn $35,000 from your RRSP and your tax rate is at 20%, you are saving another $7,000 by leveraging the Home Buyer’s Plan.
To use those programs to the fullest, you need to plan ahead. Talk to one of our experienced Mortgage Advisors today to help you find the best options availale to you.