Is the current real estate boom and rising property prices putting a damper on your dream of becoming a homeowner? Is it crazy to think about buying a home right now? Not really. You can absolutely achieve your home-buying dream, as long as you focus on 2 key things: paying off your debts and saving up for a down payment. We give you the lowdown on these two very important aspects of buying your first home.
Managing my debts: “I’d like to buy a home within the next five years; which debts should I pay off first?”
Your financial situation will be evaluated when you apply for a mortgage. You’ll want to get an accurate picture of your finances before you start that process and determine your ability to repay your debts. An advisor can help and calculate your debt ratio with you. Based on the results, you can determine which debts to pay off first, depending on their payment terms and interest rates.
Since student loans are generally amortized over 10 years, the applicable rate is often low. And since the interest paid during the year is eligible for a non-refundable federal and provincial tax credit, accelerated repayment of these loans may not be the best option.
Credit cards, lines of credit, personal loans, car loans and other point-of-sale financing generally have the highest interest rates. These debts will be considered when you qualify for mortgage financing.
Good to know
The debt-to-income ratio is a calculation that estimates the percentage of your gross income that will be used to pay off your debts. Your financial institution will calculate it when you apply for financing, such as a mortgage.
A bit about down payments
It’s important to know that the higher your down payment, the lower the mortgage, and the less interest you’ll pay.
The recommended down payment is ideally 20% of the property value. If you don’t have that amount and you and your project qualify, you may be able to use mortgage loan insurance. In this case, your down payment would have to be at least 5%.
Also, when you apply for mortgage financing, you’ll still have to prove to your financial institution that you have the equivalent of at least 1.5% cash to cover start-up costs.
Saving: “I’d like to save up for a down payment; where should I start?”
What is mortgage loan insurance?
If you’re buying a home with less than a 20% down payment, you’ll need to purchase mortgage loan insurance from CMHC or Sagen. Premiums vary based on the down payment and must be paid at the time of purchase or added to the loan amount. This insurance protects your financial institution in the event you’re not able to make your mortgage payments.
A savings strategy has many benefits and could help you reach your goals! The sooner you start, the sooner you’ll get into the savings habit. It takes a bit of planning and a lot of discipline to put away the few thousand dollars needed to buy your first home. Here are some tips.
Start contributing as soon as possible
The principle is simple: put time and patience on your side The sooner you start to save, the more time your savings have to grow and the more interest you’ll earn. This principle of compound interest could allow you to accumulate a much larger down payment than you expected if you implement a savings strategy early in your financial life and get good returns.
Set up automatic transfers
Depending on the frequency you choose, money gets transferred from your chequing account to your Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) so you can participate in the Home Buyers’ Plan (HBP). There are a number of investment options available at Desjardins.
Learn more about the benefits of automatic transfers.
Tax-advantaged savings plans
As the name implies, a TFSA has the advantage of allowing you to build tax-free savings throughout your life, for anything special you want to save for or to build an emergency fund. Money in a TFSA can be converted to RRSP contributions to maximize tax benefits. The plan is subject to certain rules.
An RRSP (Registered Retirement Savings Plan) can give you the opportunity to pay less tax, since your contributions reduce your taxable income. Like a TFSA, interest income is also tax-sheltered. A major advantage for someone who qualifies as a first-time home buyer is the possibility of using the RRSP to participate in the Home Buyers’ Plan (HBP). There are also many conditions that have to be met in order to contribute to this plan and benefit from its tax advantages.
Boosting my down payment: “How can I take advantage of government programs to achieve my homebuying dream?
FHSA or HBP: Which one to choose?
You can use your FHSA and HBP together to make a down payment on your first home, or choose the one that's best for your needs and goals.
HBP
Under the government program called the Home Buyers’ Plan (HBP) and subject to certain conditions, you can take money out of your RRSP to increase your down payment so you can buy your first home. This could reduce the amount of your financing and your mortgage payments. If you qualify as a first-time home buyer and meet the other eligibility requirements, the HBP can allow you to withdraw up to $35,000 from your RRSP, and even $70,000 per couple, to buy a new or existing home. You pay no tax on the amount withdrawn in the year of withdrawal and have up to 15 years to pay it back, without interest. It’s like taking out a loan on your RRSP.
Even if you don’t have an RRSP, you can take advantage of the HBP if you have unused contribution room. Read here to find out how to do that.
FHSA
You can withdraw all your contributions (lifetime limit of $40,000) and the accumulated investment income from your FHSA to buy a qualifying home.
Withdrawal taxes
You won't be taxed on the amount withdrawn if you use it to buy a first qualifying home.
Repayment
You don't have to pay back the amount withdrawn from your FHSA.