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Using your RRSP for your downpayment
Getting a pre-approved mortgage
What type of mortgage should you chose?
Steps in obtaining a mortgage for the first time (New)
Use your RRSP for your downpayment
First Time Home Buyer? Don't forget about the RRSP Home Buyers' Plan. It
can be all or part of your down payment. The rules have changed in
recent years, so if you think you know them, double check here!
- What is the Home Buyers' Plan
- Who can participate in the HBP? and How many times?
- How does it work? � No Penalties
- Summary of conditions for participating in the HBP.
- Benefits
- Establishing an RRSP with borrowed funds for a tax refund
- Managing tax refunds
- What else should you know?
What
is the Home Buyers' Plan
The Home Buyers' Plan ("HBP") is a federally instituted
government program designed to assist "qualified" buyers in
the purchase of a new home. Until 1999, the program was available only
once and you had to buy or build the qualifying home for yourself,
however, the rules have changed. In order to qualify you have to
complete Form T1036 which is available at your tax services office.Keep reading to learn more!! And remember, whether you have RRSP savings or no RRSP savings, the HBP can be applied to you!!
Who
can participate in the HBP? and How many times?
You can participate in the HBP more than once in your lifetime if:
- your HBP balance for your previous participation is fully repaid at the beginning of the year you want your participation in the HBP to occur; and
- you met all the other HBP conditions that apply to your situation.
- you acquire a home under the HBP for a related disabled person that is more accessable to or better suited to the needs of that person; or
- you withdraw funds from your RRSP under the HBP and provide those funds to a related disabled person that is more accessable to or better suited to the needs of that person.
How
does it work? � No penalties
Under the "HBP", Revenue Canada permits you to use your RRSP
funds towards the purchase of a new home. The default insurance
companies support this program (when your down payment is less than 20%)
in allotting the RRSP funds as a source of down payment.
- No
penalty for withdrawal
There are no negative effects from removing funds from the RRSP � in short, individuals are able to withdraw monies from their fund without penalty:
- No tax is owed on the monies withdrawn
- No interest is paid on the monies while it is outside of your RRSP
- There is no monitoring of the monies while outside your Plan
- Subject
to restrictions
Regardless of no penalties for withdrawing funds, there a re certain guidelines that must be followed in order to remain protected under the HBP' umbrella:
- There is a maximum of $25,000 that can be withdrawn from one individual's RRSP.
- There can be a maximum of two first-time buyers in the purchase of a new home, and each individual can withdraw up to $25,000 for a total of $50,000.
- The purchased home must be owner occupied.
- The RRSP must be repaid within 15 years with minimum annual payments of 1/15th of the withdrawn amount � failure to do so will result in 1/15th of the RRSP initially withdrawn having to be added back to taxable income in any year the minimum re-deposit is not made.
Summary of conditions for participating in the
HBP.
Conditions for participating in the HBP.
- Situation 1
- You buy or build a qualifying home for yourself.
- Situation 2 -
- You,
a disabled person, buy or build a qualifying home for yourself.
Situation 3 -- You buy or build a qualifying home for yourself for a related disabled person.
- Situation 4 -
- You help a related disabled person buy or build a qualifying home.
Situation
1
2
3
4
Person responsible for meeting conditions
Y
Y
Y
RDP
Y
RDP
Conditions to meet before applying to withdraw funds
Enter into agreement to buy or build qualifying home
Y
Y
Y
N/A
N/A
Y
Intend to occupy qualifying home as principal place of residence
Y
Y
N/A
Y
N/A
Y
Be considered a first-time buyer**
Y
N/A
N/A
N/A
N/A
N/A
HBP balance on Jan. 1 of year of withdrawal is $0
Conditions to meet when a withdrawal is made
You or your spouse can't have owned the qualifying home more than 30 days before withdrawal is made
Y
Y
Y
N/A
N/A
Y
Resident of Canada
Y
Y
Y
N/A
Y
N/A
Completion of Form T1036
Y
Y
Y
N/A
Y
N/A
Receipt of all withdrawals in same year
Y
Y
Y
N/A
Y
N/A
You cannot withdraw more than $20,000
Y
Y
Y
N/A
Y
N/A
Comdition to meet after your withdrawals have been made
Buy or build the qualifying home before Oct. 1 of the year after the year of withdrawal
Y
Y
Y
N/A
N/A
Y
** NB. You are not considered to be a first time homebuyer if, at any time during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal, you or your spouse owned a home that you occupied as your principal place of residence.Benefits from using the Home Buyers' Plan.
The utilization of your RRSP's within the guidelines of the HBP results in benefits that are quantifiable immediately and extend over the long-term.
- Increased down payment
- Decreased principal owing
- Avoidance of substantial interest costs over that accrue over long periods
Establishing an RRSP with borrowed funds for a tax refund.
The "HBP" permits an individual to establish an RRSP with borrowed funds, and then use the resultant tax refund for a down payment. In this scenario:
- The individual borrows funds that are contributed to an RRSP.
- After a 90-day period, the RRSP is collapsed to repay the loan.
- The client receives a tax refund that can be applied to the purchase of a home.
- The tax refund is in the individual's hands at the time of closing.
- The lender can verify that the borrower has proven liquidable assets equal to a minimum equity of 5% of the purchase price.
- set up a meeting to determine each client's approximate refund amount
- arrange the RRSP loan
- provide a mortgage pre-approval based on the information provided
Managing Tax Refunds
The government does not monitor the funds that are withdrawn from RRSP's for the purposes of the HBP. Therefore, providing that an individual has qualified as a buyer and has purchased a qualifying home, they may do whatever they desire with the money. Furthermore, the income tax refund received may be used in whatever manner decided, such as:
- Clearing the balance on credit cards
- Reducing, or retiring, personal loans
- Making lump sum payments on a mortgage
- Purchasing household necessities � appliances, furniture, accessories etc
- Increasing the down payment to reduce/avoid default insurance premiums
- Paying for legal fees and or tax adjustments
What else should you know?
The Home Buyers' Plan enables you to borrow money to top up your RRSP plan using accumulated RRSP eligibility limits. If your tax assessment notice indicates you are eligible for $18,000 in contributions in the current year, and you already have $4,000 in a self-directed plan, you are allowed to borrow � subject to credit approval � the $16,000 to buy the RRSP required to bring you up to the $20,000 Home Buyers' Plan limit.
Then you can claim the eligible deduction against your current year's income in order to get a large tax rebate. You can use the rebate to pay down the loan or apply it to the cost of buying the home. Here, of course, the amount of tax you're paying each year is an important factor. If the $16,000 deduction in this example results in a $5,000 tax rebate, it can be used as you see fit. If, on the other hand two partners each earning $80,000 per year take their maximum RRSP of $20,000 each in the current year, they could net a total of $15,000 or more in a tax rebate.
You are then allowed to withdraw up to the $25,000 maximum from the RRSP 90 days after topping up or creating the plan, subject to the re-deposit requirements described above.
Be Careful � If you're planning to borrow the money for the maximum RRSP, you could end up disqualifying yourself for a mortgage because your monthly payments will be too high. Your "total debt servicing ratio" � the proportion of your gross income required to service both the home related costs and other monthly obligations � may exceed the usually acceptable monthly maximum of 40%. Another $600 per month could well make the difference in whether or not you'll qualify for a mortgage. As your mortgage consultant, I am the best person to advise you on this process.Use your RRSP � you don't need existing RRSP funds to use HBP
Buying with as little as 5% downpayment.
Don't have the usual 20% down payment?
No worries � Increase your leverage with a high ratio mortgage! This consumer-oriented program makes the dream of home ownership a reality for more Canadians than ever before.What is it?
Two programs are available that let you buy a home for as little as a 5% down payment. One is administered by Genworth Financial, a private sector insurer, and the other by CMHC, a Federal Crown Corporation. Read carefully; the small print could create unexpected hitches! I will help guide you through the process.
Who is eligible?
An applicant who meets the following lending criteria:
- Good credit
- Can show income stability
- Sufficient
funds to cover down payment and closing costs
How it works
Both programs allow you to obtain a mortgage of up to 95% of the purchase price. Depending upon the percentage of down payment to be used, CMHC and GE charge the following one-time insurance premium to you, the borrower. This premium can be added to the mortgage without affecting the Loan To Value ratio (LTV).
Down Payment = % Financing
(as % of mortgage amount)Insurance Premium
(calc. from mortgage amount)5 - 9.9% 90.1% - 95% 2.75% 10 - 14.9% 85.1% - 90% 2.00% 15 - 19.9% 80.1% - 85% 1.75% 20 - 24.9% 75.1% - 80% 1.00% 25 - 34.9% 65.0% - 75% 0.65% (special circumstances) 35% plus Up to 65% 0.5% (special circumstances)
For example, if you're buying a home for $200,000 with a down payment of $20,000 (or 10% of the purchase price), the mortgage would be subject to a 2.0% Insurance fee or $3,600. The fee is one-time and can be added to the mortgage. To qualify for a CMHC insured mortgage:- your
monthly payments for "shelter costs" (mortgage
principal and interest plus taxes and heating) must be no
greater than 32%-35% (depending on the lender) of your gross pre-tax family income.
- your monthly payments for all obligations � shelter costs plus loan, lease and credit card payments, plus alimony etc. � must not exceed 40%-44% (depending on the lender) of your gross pre-tax family income.
What else should you know?
In general, the credit status of an applicant must meet the lending criteria of the particular mortgage lender. I can help you meet the required criteria and assist you with the entire mortgage process. Plus we deal with many lenders and therefore have a greater chance of matching you with a lender.
Also, while CMHC will qualify an ex-bankrupt applicant for insurance two years after discharge with subsequent re-established credit, many lenders' own rules over-ride this feature, and they will decline the application.
On the other hand there are a number of lenders who specialize in granting and administering mortgages to the full extent of the National Housing Act at competitive interest rates.
In addition to the slight differences described above in mortgage terms and qualifying ratios (Total Debt Service ratio ranges from 40% to 44% depending on the lender) there are a few important conditions which apply to eligibility under this program:- The applicant must be able to prove that their down payment comes from their own resources � savings, sale of investments, etc., the exception being a family gift that never has to be repaid, and which is in the borrower's possession before the application for Mortgage Loan Insurance is sent to CMHC.
Getting a mortgage pre-approved
Be prepared
Don't miss out on the home of your dreams because you can't arrange financing quickly enough. Avoid disappointment. Apply online for a pre-approved mortgage with INVIS now!What is it?
A pre-approved mortgage puts your financing in place before you make an offer on a home. Usually, the sale of a home is contingent upon the buyer securing the required financing within an agreed-upon time frame. If you are unable to do so, the sale could fall through. With a pre-approved mortgage you'll be able to make a firm offer for the home of your choice. And as most Realtors will tell you, a firm offer adds an awful lot of leverage to price negotiations! Click here to find out how you can get pre-approved by applying online.Who is eligible?
Any qualified borrower.How it works
Click the Apply Online link at the top of this page for a pre-approved INVIS mortgage now and start enjoying the convenience and negotiating leverage that INVIS provides. All information you supply is completely secure and will be held in the strictest confidence.
Once you have received your pre-qualification from me, I'll help you find a lender with the most competitive rates who will issue your prequalification certificate. After a brief telephone contact from the mortgage lender discussing options, and requesting you to send proof of income and employment, you can be "pre-qualified" � quickly and easily.
After you purchase your home, simply contact me to provide property and offer details, along with any other information requested, and your actual mortgage can be approved within hours.
What type of mortgage should you choose?
Today, more than ever, there are numerous mortgage options available.
Don't be confused. Here at INVIS, I can help you find the best product for your needs and negotiate you the best rate. I do the research for you, enabling you to avoid the frustration and confusion of having to do it yourself, and explain the available options. - You buy or build a qualifying home for yourself for a related disabled person.
-
- Mortgage Categories
- What terms and payment options should you choose?
- Short-term risk and variable
- Long-term
- Split-term
- Prepayment options
- Payment changes
- Payment frequency
Mortgage Categories
- Fixed-rate:
-
6 month, 1, 2 & 3 year (open, closed and closed - convertible) 4, 5, 7 & 10 year closed
- Variable-rate:
-
3, 4 and 5 year (open, closed, closed-convertible and capped)
- Split-term:
-
Combination of all possible terms (6 month through 10 years)
- Self-directed RRSP:
-
A specialty mortgage rate � term optional � within CMHC guidelines. Invest your own RRSP funds into all or part of your home mortgage.
What terms and payment options should you choose?
It all depends on what you want. I can assess your personal situation and needs to find the best mortgage for you at the best rate.
Short-term risk and variable
If rates are low and stable, and/or you are prepared to take a risk, you can generally pay a lower rate with a short-term mortgage. You simply roll over your term every 6 months, or float your rate against prime, with the option of locking in to a longer term at a later date. This is not for everyone, however, as sudden upward rate movements can have a significant impact on your payments.
Long-term
Any term 3 years or longer is considered "long term" in today's economy. Because long-term rates are usually higher than short-term rates, you may not want to choose this option. On the other hand, by locking in you will avoid exposure to rate increases. You'll have the comfort of knowing exactly what you payments will be and you'll be able to manage your budget accordingly.
Split-term
A mortgage which allows you to minimize � or hedge � your interest rate risk by splitting your mortgage into 5 parts. For example: A $150,000 mortgage could be split into five $30,000 segments with terms of 6 months, 1, 2, 3 and 5 year terms negotiated at today's best rates. The average rate would rise or fall much more slowly than changes in the market, however, as only the shorter terms are affected by even the most volatile rate movements over the first few years.
Prepayment Options
Many lenders allow you to make a lump sum payment � usually 10% to 20% of the original principal balance. In addition, many mortgage products now include a "double-up and skip-a-payment" feature. This lets you "bank" extra mortgage payments for a rainy day, at which time you can "skip" them if you need to. Ask me to advise you on your options today!
Payment Changes
Most mortgages now allow the amortization to be adjusted by increasing the payment on closed terms by 10% � 20% per year, once annually.
Payment Frequency
Most mortgages now come with the option to pay your mortgage at a frequency that matches your cash flow � weekly, bi-weekly or semi-monthly. The added benefit of the "accelerated" weekly and bi-weekly payments is that by dividing a regular monthly payment into two or four respectively, and deducting it at the new interval, an extra payment a year is made directly against principal. The surprising effect of this one extra payment a year is to reduce the amortization of the average mortgage by approximately 5 years, with cash savings at the end of the mortgage term.
"My job is done when you know your options"
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