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If you’re considering buying your first home, there are first-time home buyer incentives for you to take advantage of. But of course, the benefits from the programs will depend on your own eligibility so it’s important that you learn about the programs and know what benefits are available to you. Your best starting point is to talk to a qualified mortgage specialist who knows about the different incentives that exist for the various programs, and have them explain how each program works. But you can visit the internet to learn a few things, and I will share some information here as well.  

As a first time home buyer the following incentives are available to you:

  1. Land Transfer Tax Exemption (to a maximum of $4000)
  2. Tax exemption on using up to $35,000 of your Registered Retirement Savings Plan
  3. First-Time Home Buyer Incentive Program (Shared-Equity Mortgage with the government)
  4. Canada Mortgage and Housing Corporation (CMHC), Genworth Financial (GF), or Canada Guaranty (GC) Lower Down Payment Mortgage (Less than 20% down payment required)

Land Transfer Tax Exemption

Whenever you purchase a home, you have to pay the government land transfer taxes which is a tiered tax calculation system that is based on the value of the home. If the purchase price of the home is less than or equal to $358,000, you pay no tax. However, if the price exceeds $358,000 the maximum refund is $4000.  

Tax exemption on $35,000 of your Registered Retirement Savings Plan (RRSP)

Any money you put in an RRSP is taxed deferred. You pay taxes only when the money is withdrawn from your account. Whenever you withdraw money from your RRSP, there’s always a withholding tax amount that is based on the amount withdrawn as shown below

  • $5000 or less withdrawn – withholding tax is 10%
  • $5001 to $15000 withdrawn – withholding tax is 20%
  • More than $15000 withdrawn – withholding tax is 30%

However, when you’re buying your first home, you’re able to withdraw up to $35,000 from your RRSP with no withholding tax. 

Hold on, don’t start doing your happy dance just yet! There is no free lunch! And the taxman doesn’t allow you to forget that you owe him taxes for too long either. You must pay back your RRSP the amount you withdrew within 15 years. 

And a payment holiday lasts only 2 years. You must start repaying your RRSP the second year after you purchased your home otherwise the taxman will add income — based on the calculation:($amount withdrawn ÷ 15)  — each year that you file your tax returns until the amount is fully repaid.

You may do the repayment over 15 years or repay faster. Each time you repay more than the required amount, the outstanding amount is updated and a new repayment schedule is done based on the number of years remaining.

First-Time Home Buyer Incentive Program 

Consumers who are finding it difficult to save a high downpayment to purchase a home can participate in the First-Time Home Buyer Incentive Program that the government offers. This program helps qualified first-time homebuyers to have a higher down payment, and thus reduce their monthly mortgage payments without overextending their expenses. For instance, suppose the first-time home buyers have their 5% down payment, they could participate in the program to have an additional 5% or 10% down payment which will reduce their monthly mortgage payments without adding to their financial burdens.

As I stated above, however, there is no free lunch. If the government helped you with the down payment, it means the taxman has dibs on the equity in your home. Hence the First-Time Home Buyer Incentive program is a shared-equity mortgage with the Government of Canada. Put simply, the government will own a piece of your home! 😱😱

The amount of down payment you receive will depend on the type of home you’re buying, and the criteria listed below: 

  • 5% or 10% for a first-time buyer’s purchase of a newly constructed home
  • 5% for a first-time buyer’s purchase of a resale (existing) home
  • 5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home

If you participate in the First-time Home Buyer Incentive and you sell the home, you must repay the incentive at the point of sales. Otherwise, the incentive can be paid up to 25 years after you purchase the home.

How Much Of The Incentive Must Be Repaid?

The incentive repayment is based on the percentage incentive you received at the time of purchase, and the fair market value at the time of repayment. For instance, if you received a 5% incentive when you were purchasing the home, you would repay 5% of the home’s value at repayment. If you received a 10% incentive, you would repay 10% of the home’s value at repayment.

I believe that this is an excellent plan for you if you’re ready and qualified to purchase a home, but your down payment will result in a higher mortgage payment than you want. My advice to you however is to not get complacent and wait for the 25 years to repay the incentive back.

With the way the market is going today and the announcement that Canada will be increasing the number of immigrants due to the reduction in the population growth because of COVID and the slowdown in immigration, house demands will drive up the house prices and the longer you take to pay back the incentive, the more you will give up later. And not only that, you would be ripping off yourself if you could have afforded to own all the equity in your home but you procrastinate and wait until it’s too late to repay.

The bright side, however, is that since the government has a shared investment in the home, if the home depreciates the government also shares the loss in the property value.

Canada Mortgage and Housing Corporation (CMHC), Genworth Financial (GF), or Canada Guaranty (GC) Lower Down Payment Mortgage 

If your mortgage is more than 80% of the purchase price of your home, it is considered a high-risk mortgage. Financial institutions require insurance for high-risks mortgages and you can use one of the 3 mortgage default insurance companies, CMHC, GF or GC to insure your mortgage. 

A high-risk mortgage is available only on a primary or secondary residence, however. If you’re purchasing for investment purposes your mortgage has to be 80% or less than the purchase value.

While this is a great program to encourage you to purchase a home, do remember the higher your mortgage the higher your mortgage payments, so make sure your monthly mortgage payment is within your budget. Mortgage approval doesn’t necessarily mean affordability because a bank doesn’t ask you for your budget, they qualify you based on your income, debt repayment, and general expenses.

With historically low mortgage rates, now may be a great time for you to purchase a home. But before you take the leap, the best thing you can do is to be proactive and invest some time to find what programs may work for you. And make sure that you carefully check out what all the requirements are for any given program to see if you qualify.

And be careful that you only buy as much house as you can afford. That is part of the problem right now for many homeowners. Because the bank approved them for $”X” they assume that is what they can afford. 

Unfortunately, the bank doesn’t take into consideration the fact that you may send money back home to your family each month, or that you want to take family vacations once a year. The point is, don’t think you have to go all the way up to your budget, you decide what monthly payment you will be comfortable with… and stick to your guns…don’t budge from that amount! 

I hope you now understand that although the cost of housing feels like it’s getting out of reach for many, if you are a first-time home buyer, there are still opportunities for you to access the capital you need to get you over the starting hump. So consider these options, do your due diligence carefully before taking the plunge, and be sure to take the greatest advantage of opportunities available to you, in order to reduce your mortgage obligation when you purchase that beautiful first home!