The article “Advice On Making Your First Home More Affordable” was originally published on MoneySense on May 14, 2019.
Irene and her partner want to buy a house with savings, some help from her dad and a mortgage from an alternative lender. What are the implications?
Q. My partner and I rent a two-bedroom apartment in Toronto in a great neighbourhood for $1,850 a month—so, a great deal. We have been living together for three years and would like to buy a house together next year, when we both turn 30.
We’ve looked around and can probably buy a small bungalow north of Toronto for about $900,000. Since only earn about $120,000 combined, my father has suggested he buy a one-third share of the house outright with $300,000 (name on title for one-third) and then my partner and I can buy the other two-thirds in our name, which would likely mean a mortgage of about $500,000 for us. (We have saved $100,000 for a down payment ourselves.)
Would we be able to use Home Buyers’ Plan to borrow from our RRSP for a down payment in this case? And would we be able to call the house our principal residence for tax reasons?
Finally, would it be wise to consider an alternative lender for our mortgage, even though our bank would give us a $500,000 mortgage? We’ve checked and the non-bank mortgage interest rates can be as much as 0.75% lower, which would go a long way to helping with affordability.
A. That’s nice of your father to offer his help in your home purchase, Irene. And while the positives of his offer are obvious, I do also want to point out that there are some potential caveats—financial and otherwise.
There are several questions the three of you need to consider before moving forward. Will your father be a “silent” partner, or will he be involved in decisions related to the house? Who will decide—and pay for—repairs or renovations? What happens if your father wants to sell someday, or if you want to buy him out? Or what if he develops a cognitive impairment like dementia? What happens if he dies?
I think it’s important to consider these potential situations in advance of an undertaking like this to be sure everyone is on the same page. You’re the linchpin here, Irene, and you want to be sure you don’t put your relationship with your father or your relationship with your partner at risk. For that matter, you don’t want to risk their relationship with each other.
You asked about using the Home Buyers’ Plan (HBP), which allows you to withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP) to be used towards the purchase or construction of a home that you intend to occupy as your principal place of residence. The limit was increased from $25,000 in the federal budget for withdrawals taking place after March 19, 2019.
If, in the past four years, neither you nor your common-law partner occupied a home that you or your common-law partner owned, you can both qualify for the HBP. That means you can access up to $70,000 combined. Your father’s part ownership would not limit your participation in the HBP.
You and your common-law partner may also both qualify for the principal residence exemption so that any growth in the value of the property from when you purchase it to when you sell it is tax-free. The fact that your father is a co-owner will not impact your ability to claim the principal residence exemption for your share, Irene, though your father may have to pay tax on his share of any appreciation when you decide to sell the home or buy out his share.
As for whether to use an alternative lender: That is a personal choice. I find people can be reluctant to borrow from a non-bank lender; personally, I’d be more worried about giving my money to a small financial institution than borrowing money from one. If you deposit money with a small financial institution, they have your money. If you borrow money, you have theirs.
With any lender, you need to make sure you’re comfortable with the terms of the mortgage and you may need to give up something in exchange for the lower rate. For example, you may have restrictions on prepaying the mortgage, or porting the mortgage to a new home.
One final consideration, Irene, is making sure you and your partner can afford this home on an ongoing basis. The help from your father to buy one-third upfront is great, but you should make sure the mortgage payments, property taxes, utilities and other carrying costs are within your budget so you don’t get in over your head.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
If you have a question for Jason, please send it to firstname.lastname@example.org