The article “Affordability tips for first-time home buyers to securing a mortgage” was originally published in MoneySense on October 28, 2021. Photo by Jessica Bryant via Pexels.
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 we only earn about $120,000 combined pre-tax, 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; that 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 the 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 purposes?
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. – Irene
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.
The statistics show that your situation is common for many first-time buyers, Irene. A fall 2021 report from CIBC Economics found that almost three out of 10 buyers received help from their parents—at an average of $82,000 nationally. In expensive markets like Toronto and Vancouver, the gifts were even more substantial. First-time home buyers in the first three quarters of 2021 received an average of $130,000 in Toronto and $180,000 in Vancouver. Move-up buyers in the two cities received even more help from their parents—$200,000 and $340,000, respectively.
Take advantage of the Home Buyers’ Plan to access your RRSP
You asked about using the Home Buyers’ Plan (HBP), which allows first-time home buyers to withdraw up to $35,000 from their 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.
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 HBP (not to be confused with the first-time home buyer’s incentive program). That means you can access up to $70,000 combined. Your father’s part ownership would not limit your participation in the HBP.
You can make a single withdrawal or multiple withdrawals from your RRSPs, but the key is they must all take place in the same calendar year. You can also withdraw from multiple RRSPs if you have more than one, as long as the total withdrawals do not exceed $35,000 per person. And you must move into the home within a year of buying or building it.
You can even contribute to your RRSP as little as 90 days before the withdrawal and still claim a deduction for the contribution on your tax return. HBP withdrawals are tax-free, and repayments begin the second year after the year of withdrawal. So, if you take your HBP withdrawal in 2022, you must begin making repayments no later than the 2024 tax year.
Keep in mind contributions made during the first 60 days of the calendar year can be claimed on your previous year’s tax return. So, for a 2022 withdrawal, you have until March 1, 2025 to make a repayment. The minimum repayment is one-fifteenth of the cumulative HBP withdrawals. So, if you took $15,000, the minimum repayment would be $1,000 per year for 15 years. A maximum $35,000 withdrawal would have a required repayment of $2,333.33.
If you repay less than the minimum in a given year, the difference is added to your tax return as income. Keep in mind you lose the ability to recontribute this amount to your RRSP forever.
As a first-time home buyer, if you contribute more than the minimum to your RRSP in a given year, you can treat it as an additional repayment of your HBP balance. It would reduce your required repayments in subsequent years.
So, if you repaid $5,000 of a $15,000 balance in the first repayment year, your repayments in the next 14 years would be $10,000 divided by 14, or $714.28. It is usually better to treat any extra contributions as non-HBP repayments, or just regular RRSP contributions, and to claim them as deductions to generate tax refunds. This is because HBP repayments do not generate tax deductions—they just help you avoid the income inclusion that would apply if you do not contribute the minimum.
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.
Should you use an alternative lender?
As for whether to use an alternative lender: That’s a personal choice. I find people can be reluctant to borrow from a non-bank lender. Personally, I’d be more worried about depositing 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.
Interest rates may be lower when you look beyond the Big Banks in Canada. You should look at the terms of the mortgage, though, as there could be additional appraisal fees, administration charges, prepayment restrictions or different mortgage penalty formulas. An accredited mortgage professional may be able to help you navigate your borrowing options from different lenders, as opposed to a mortgage specialist at a bank who represents only that bank.
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.
