Buying your first home is one of the biggest milestones in your life. It’s something that most people dream of from a very young age. With big milestones come big challenges: one of the biggest challenges that come with purchasing your first home is saving for a downpayment.
The conventional downpayment for a home is 20% of the purchase price. For example, your mortgage lender would expect a 60K downpayment for a property worth 300K. The minimum downpayment in Canada is 5% of the purchase price, however, with downpayments less than 20%, you must purchase mortgage default insurance. Keep in mind, 5% of 300K is still 15K, which is a significant amount of money.
In the early years of adulthood, it can be very difficult to save this kind of money without exterior influences such as trust funds or gifts from relatives. Luckily, Canada and Nova Scotia offer various supports that allow first-time homebuyers assistance in making a downpayment. In this article, we will dig into the Federal Programs that are in place to assist buyers. Tune in next month as well, when we dig into the provincial programs that are available to Nova Scotia Residents!
The Government of Canada has three programs to help first-time home buyers: the Home Buyers’ Amount tax credit, the Home Buyers’ Plan (HBP), and the First-Time Home Buyer Incentive. We will detail each of these programs below to help you or someone you know achieves their real estate goals.
The Home Buyer’s Tax Credit
Eligible first-time homebuyers can claim a $5000.00 non-refundable income tax credit on a qualifying home. To qualify for this tax credit, you must:
-buy a new or existing property that is either a single-family home, townhouse, condo, or certain multi-unit properties.
-Be a first-time home buyer: this can apply to those who have not resided in a home they own for the past 5 years.
-The property must be your principal place of residence.
This credit does not need to be applied for or approved, you simply put the Home Buyer’s Amount of $5000.00 on Line 31270 of your income tax return. You can split this amount between you and your spouse, but it cannot exceed $5000.00 total.
The credit results in a 750$ rebate on the taxes you owe for the year. Which will not pay out any money to you, but may reduce your income tax owing to zero if you owed less than $750.00. This may help alleviate the financial burden of added income tax, and allow you to use that money toward real estate.
The Home Buyer’s Plan
The Home Buyer’s Plan is a federal program that allows first-time homebuyers to withdraw up to $35,000 per individual from their Registered Retirement Savings Plan tax-free to put towards their first home. To qualify for this incentive, you must:
-Be a resident of Canada
-The home in question must be your principal residence
-You must be a first-time homebuyer
-Applicants must have a written agreement to buy or build a home
To apply for the Home Buyer’s Plan, simply download and fill out form T1036 here which is entitled ‘Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP’.
Once you are approved for the Home Buyers’ Plan, you can withdraw up to $35,000 from your RRSP without paying any withholding taxes. You should know that participants in the Home Buyers’ Plan must repay the amount they withdrew from their RRSP within 15 years.
First-Time Home Buyer Incentive
The First-Time Home Buyer’s Incentive was introduced by the Federal Government to make first-time home-buying more achievable for the middle and lower class. The incentive acts as a shared equity loan, where the government lends first-time home buyers 5-10% of the purchase price to put towards the downpayment. This must be repaid either in 25 years or when the home is sold.
First-time Homebuyers can apply for this incentive after they have been pre-approved for a mortgage. We should note that the purchase price of the home cannot exceed four times your qualifying income. When you pay back this loan, the amount may be greater than what you originally received, as the government owns equity in 5-10% of your home, which will go up in value the longer you own it. To qualify, you must:
-Be a Canadian Resident
-Be a first-time homebuyer
-Have a total qualifying income below $120,000
-Borrow no more than 4 times your income
-Have enough funds to make the minimum downpayment
-Be pre-approved for a mortgage
To apply, fill in the forms on the FTHBI website. You then give the forms to your lender who will submit them on your behalf.
When you are in the beginning stages of purchasing your first home, speak to your trusted real estate professional and mortgage advisor about these options. These are great programs you should take advantage of to begin owning real estate! Tune in next month when we dig into three programs for first-time home buyers in Nova Scotia!
Author: Jordan Gunn
Licensed Real Estate Assistant
The Andrew Perkins Real Estate Team
Keller Williams Select Realty