single first time buyer

If you believe all of the real estate headlines, 2015 will be the year of the first-time buyer. So, if you have yet to buy your first house or condo, read on. It’s great to be told this is your time to buy, but are you ready to purchase your first home? Prices are all over the map, but there are affordable condos both near and far. It’s the dreaded down payment. Many people think they need to put 20% of the purchase price down as a down payment. That isn’t so, but if you are putting less than 20% down, then you will pay an insurance premium to CMHC to ensure that you will not default.

20%?!!! Yikes. On a $500,000 place (more likely a condo than a house), that’s $100,000. Even on a more modest $400,000 place, that’s still $80,000. Wow. You check your savings account and there’s only $5,000 in there.  No, it’s not hopeless. You have options. You can still buy with as little as 5% down. Yes, I said 5%, but if your downpayment is less than 20%, you must pay an insurance premium, usually to Canada Mortgage and Housing Corporation  (CMHC) https://www.cmhc-schl.gc.ca/en/co/buho/index.cfm. On a $400,000 condo, CMHC will charge you an $11,900 premium. Now you’re thinking it’s worse, you need $20,000 down payment AND an extra $12,000 for CMHC. The CMHC portion can be rolled into your mortgage payment, so it will be less painful. Like I said, you have options.

Option #1: Borrow from yourself: If you don’t already have an RRSP, open one. If you have been earning income, you already have room to deposit from years you didn’t deposit any at all or the maximum amount. Take out an RRSP loan for as much as you can afford or your maximum. It’s almost free money. If you borrow $20,000, the tax return refund will pay back some of the loan. 30% would bring your loan balance down to $17,500 and you already have $5,000. The remaining $12,500 will be offset by the $11,900 CMHC premium you will save. So you only have to save another $600. Divide $600 by a $5 Starbucks coffee. That’s 120 days of sacrifice. You can do that. Once the RRSP money is on deposit for 90 days, you can borrow up to $25,000 ($50,000 for a couple) and use it to buy a home. Repayment starts in the second year after withdrawal and is made over a maximum of 15 years. If you have not owned in the last five years, you are considered a first-time buyer for RRSP purposes.

Option #2: Borrow from someone else: Many parents want to see their children maturing and getting themselves established and are able and willing to help. A non-interest-bearing loan will automatically save you that $11,900 CMHC fee. Some parents will make the loan a gift. It is happening more and more frequently.

Option #3: Save More. How long did it take you to save that $5,000? Triple that for another $15,000. The problem with that is by that time, probably a few years, condos and homes may cost 8-30% more. So you would need $2,000-$4,000 more as a down payment.

So, as you face 2015, come up with a plan if you want to be a first-time homebuyer. Remember, the good news is if you buy at the $400,000 level, and do not own a house anywhere worldwide, you will pay reduced land transfer fees. If you buy in Toronto, you will save an extra $5,725 and outside of Toronto, you will save $2,475.

It’s time to get started!

Links:
CMHC https://www.cmhc-schl.gc.ca/en/co/buho/index.cfm

RRSP Home Buyers Plan http://www.cra-arc.gc.ca/hbp/

Land Transfer Tax Calculator: http://www.chestnutpark.com/properties/land-transfer-tax-calculator