First-Time Home Buyers: Purchase Wisely

Strategies & Advice for Buying Your First Home

5 – 8 minute read

With the recent escalation of Canada’s property values, homeownership barriers are daunting. Nonetheless, planning opportunities exist for the first home purchase making homeownership potentially feasible for many young Canadians.

Homeownership is about so much more than owning a home. It is a part of the American Dream. In 2003, George W. Bush signed the “American Dream Down Payment Initiative” to assist first-time homebuyers. Homeownership is proof that equal opportunity is available to all and anyone can achieve their highest aspirations.

In Canada, around two-thirds of Canadians own their homes. While that sounds high, it is in alignment with other developed countries and slightly higher than Europe and the USA.

Purchasing a home can be an exhausting, expensive, and exhilarating experience, especially when it is your first time buying a property. Fortunately, the Government of Canada (and others) have created various programs to assist today’s generation in acquiring a home. In conjunction with some strategic financial planning, these programs can accelerate access to homeownership for many young Canadians.

Do You Really Want to Own a Home? Real Estate as an Investment

For starters, we should point out that despite some eye-popping news stories, real estate is not considered as risky as stock market investing, and it delivers lower returns accordingly. While return calculations imbed significant variability, Teranet’s House Price Index reports only a 6.9% annual return on their 11 cities Canadian composite index over the past 20 years and 6.7% during the past 10.

Vancouver is a city pushing the Canadian returns with 8.1% and 6.9% annual gains reported over 20 and 10-year periods, respectively. Edmonton drags the composite down at only 4.7%, and 1.3% returns in these periods. One needed to have invested in Edmonton before 2007 to capture a solid positive return in Edmonton real estate. Of course, this ignores sweat equity, good tenant management (should the property be rented), and bargain buys.

A chart displaying the housing returns for Edmonton and Vancouver, if considering a home purchase as an investment.

Nonetheless, young people considering their first home would not be unreasonable to reconsider and invest in higher-risk assets instead, like the stock market. Or, as a compromise, not accelerating the payment on a mortgage if extra cash ever becomes available and instead just investing it in higher return equity markets.

One can reference numerous more complicated analyses on the returns from real estate investing, but the math certainly indicates the return would not be a primary reason to purchase.

Non-Math Reasons to Purchase a Home (or Not)

When we purchase a home in Canada, we tend to make the decision on market comparables and affordability. In other words, “what are others paying for a home like this” and “can I afford it?” While the answers to both questions could be made using numbers, they are not inherently math or valuation-centred. The home purchase decision involves minimal valuation or math, as homeownership is more about the human than the calculator.

As a professional that values companies, it is very tempting to provide various mathematical perspectives on the pros and cons of homeownership. Still, with homeownership entrenched in our Canadian culture, we should accept and highlight the non-math reasons for and against the home purchase.

Reasons to make the purchase:

• The mortgage is a structured and forced savings plan allowing the generation of net worth

• One has authority to paint the walls, renovate and have autonomy over the space

• One can sell the property without a fixed lease anytime they wish

• Homeownership provides an emotional connection and sense of stability

• Sweat equity can increase the home’s value or make it faster to sell

And a prospective buyer must consider the potential of:

• The buy or sell transaction attract significant fees in the form of title taxes (some provinces), CMHC fees, broker commissions, legal fees and capital gain taxes (if not a qualified principal residence)

• Significant increase in mortgage payments due to interest rates

• Impacted credit rating if they are unable to make mortgage payments

• Costly home maintenance

The First Step, The Down Payment & CMHC

Home prices are growing faster than inflation, and high prices have translated into higher down payments. Assuming a savings rate of 10% of total median household income, it would now take five years to save for the minimum down payment (approximately 6%) on an average home.

According to a CIBC Capital Markets paper in 2021,  parents (and grandparents) are breaking all previous records with cash gifts towards the down payment on first and second homes. With most coming from the Vancouver and Toronto regions, the average gift is now at $82,000. Numerous law firms have responded with blog postings on how to “gift” while protecting the funds from potential future solvency or divorce threats.

CMHC Loan Insurance

The Government of Canada believes that homeownership by Canadians is in the best interest of our country and has created the Canada Mortgage and Housing Corporation to facilitate first-time home purchases. This then facilitates bank mortgages. If the down payment is less than 20%, mortgage loan insurance is required.

A chart outlining the minimum down payments for houses in Canada.

Mortgage loan insurance—of which CMHC is the primary provider—protects the bank if a mortgage payment is not made. It is often referred to as mortgage default insurance. Mortgage loan insurance range from 0.6% to 6.3% of the mortgage.

Current CMHC rates for home mortgages in Canada.

As one can see in the table, CMHC premiums are not insignificant. On a $475,000 home, with 5% down and a resulting mortgage at $450,000, the CMHC cost is $18,000.

Therefore, one should consider strategizing to make a larger down payment. Making the 20% down-payment would cut the CMHC cost in half, saving $9,000.

There are several strategies to consider:

• Have a parent or grandparent gift cash towards the downpayment

• Sell something of value

• Use RRSP savings

• Wait and save a higher down payment

It is important to note that without CMHC insurance, banks carry more risk and charge accordingly (reported on average at 0.3% higher mortgage rates per annum). Therefore, a cost-benefit analysis is worth considering, with a down payment around 18-19% potentially optimal. 

The Home Buyers’ Plan  and RRSP Accounts

To qualify for the Home Buyers’ Plan (HBP), applicants must satisfy several conditions. If they lived in a home that either they or their partner owned over the past four years, they would not qualify for the program. However, even if their spouse or common-law partner has previously owned a property, they may still be considered a first-time home buyer.

In addition to being classified as a first-time home buyer, applicants must also satisfy the following requirements:

• Canadian residence

• Written agreement to buy or build a qualifying home

• Hold an individual Registered Retirement Savings Plan (RRSP)

• Intention to occupy the qualifying home as the principal place of residence within one year of buying or building it

A house on a lake.

The HBP allows first-time home buyers to withdraw funds of up to $35,000 from their RRSP for a down payment, tax-free. It is important to note here that any funds that individuals are wishing to withdraw must have been in their RRSP for a minimum of 90 days—any amount that has not been sustained this amount of time will not be eligible for a tax-free withdrawal. Furthermore, funds utilized in the HBP must be taken out no later than 30 days after a buyer takes possession of their new home. 

For the withdrawal to remain tax-free, those utilizing the HBP must replace the same amount they withdrew from their RRSP in the 15 years following the transaction. Thus, if you chose to withdraw the maximum limit of $35,000, you would have to deposit a little under $200 monthly. 

Simply put, if you choose to take advantage of this program, you are required to pay back the equal amount within the 15 years following.

The repayment period starts two years following the initial RRSP withdrawal. For example, if you took money out in 2019, your first year of repayment would commence in 2021. Contributions allocated towards repayment of the HBP will not affect an individual’s RRSP deduction limit—you will still be able to make contributions separate from repayment. Once a contribution has been made, individuals can designate all or part of their deposit towards repayment. 

Alternatively, if you fail to repay or underpay your owing HBP balance for the year, any unpaid funds will be treated as a normal RRSP withdrawal; the amount must be reported on your tax forms and taxed as income.

In the end, the HBP is an excellent strategy to boost a down payment and reduce CMHC fees for those that have RRSP accounts and the ability to make the repayments.

The First-Time Home Buyer Incentive

Another government program, which can be used in tandem with the HBP, aimed at helping Canadians acquire enough money to fund the purchase of their new home is the First-Time Home Buyer Incentive (FTHBI). This program exercises all the same eligibility requirements as the HBP and is a shared equity mortgage wherein the government allows you to borrow 5% to 10% of the home’s purchase price towards a down payment.

For example, if the property you are purchasing has a current value of $400,000, you can borrow $20,000 (5%) to $40,000 (10%). However, you are required to pay back the exact same percentage of your home’s future value when you sell it within a 25-year window.

So, if your home increases in value throughout the years, you will owe more than you initially borrowed. Using the example above, if the value of your home increases from $400,000 to $550,000 and you borrowed $20,000 (5%), you will owe $27,500, or $7500 more than you initially took from the government.

calculator

If you are worried about falling home prices, one could use this program to share the downside risk as the repayment would be in a depreciating market. 

Other First-Time Home Buyer Incentives: BC Property Title Transfer Tax 

It is really important to also check your province and related incentives on a first home purchase. For example, in BC there is a property title transfer tax of 1% on the first $200,000 and 2% on the remainder (up to $2M) for residential properties. A first-time home buyer can be eligible for a full or partial exemption on this tax, worth many thousands of dollars.

Conclusions & Planning Advice

Once the home purchase has been decided, planning then begins on the mortgage terms, features, and benefits. A qualified mortgage consultant is recommended as decisions can have material impact to wealth creation. When contemplating government programs such as the Home Buyers’ Plan or the First-Time Home Buyers Incentive, it is also vital to seek advice from experts (like Qube) that possess extensive knowledge on proper program administration, tax expertise, and CRA guidance.

Unencumbered by alternative motivations, Qube will work with you to delve deep into your unique, personal circumstances and investment preferences, consider your specific financial goals, risk tolerance, and ongoing needs. Our team at Qube is committed to providing you with a holistic, diversified, and personalized investment experience. If you would like to learn more, please contact our team.

DISCLAIMER

Qube Investment Management Inc. has authored the material presented above for the promotion of financial literacy and professional development. Qube makes no warranty for the accuracy, validity, or completeness of the above information. It is not intended to provide specific advice with respect to individual financial, investment, tax, legal or accounting matters.

 For advice specific to your situation, consult appropriate investment, legal or accounting professionals.

PLANNING FOR YOUR INVESTMENTS SHOULD NOT BE OVERWHELMING.

Book a quick chat with us to see if we can help you plan for your goals.

First-Time Home Buyers: Purchase Wisely

Strategies &

Advice for Buying

Your First Home

5 – 8 minute read

With the recent escalation of Canada’s property values, homeownership barriers are daunting. Nonetheless, planning opportunities exist for the first home purchase making homeownership potentially feasible for many young Canadians.

Homeownership is about so much more than owning a home. It is a part of the American Dream. In 2003, George W. Bush signed the “American Dream Down Payment Initiative” to assist first-time homebuyers. Homeownership is proof that equal opportunity is available to all and anyone can achieve their highest aspirations.

In Canada, around two-thirds of Canadians own their homes. While that sounds high, it is in alignment with other developed countries and slightly higher than Europe and the USA.

Purchasing a home can be an exhausting, expensive, and exhilarating experience, especially when it is your first time buying a property. Fortunately, the Government of Canada (and others) have created various programs to assist today’s generation in acquiring a home. In conjunction with some strategic financial planning, these programs can accelerate access to homeownership for many young Canadians.

Do You Really Want to Own a Home? Real Estate as an Investment

For starters, we should point out that despite some eye-popping news stories, real estate is not considered as risky as stock market investing, and it delivers lower returns accordingly. While return calculations imbed significant variability, Teranet’s House Price Index reports only a 6.9% annual return on their 11 cities Canadian composite index over the past 20 years and 6.7% during the past 10.

Vancouver is a city pushing the Canadian returns with 8.1% and 6.9% annual gains reported over 20 and 10-year periods, respectively. Edmonton drags the composite down at only 4.7%, and 1.3% returns in these periods. One needed to have invested in Edmonton before 2007 to capture a solid positive return in Edmonton real estate. Of course, this ignores sweat equity, good tenant management (should the property be rented), and bargain buys.

A chart displaying the housing returns for Edmonton and Vancouver, if considering a home purchase as an investment.

Nonetheless, young people considering their first home would not be unreasonable to reconsider and invest in higher-risk assets instead, like the stock market. Or, as a compromise, not accelerating the payment on a mortgage if extra cash ever becomes available and instead just investing it in higher return equity markets.

One can reference numerous more complicated analyses on the returns from real estate investing, but the math certainly indicates the return would not be a primary reason to purchase.

Non-Math Reasons to Purchase a Home (or Not)

When we purchase a home in Canada, we tend to make the decision on market comparables and affordability. In other words, “what are others paying for a home like this” and “can I afford it?” While the answers to both questions could be made using numbers, they are not inherently math or valuation-centred. The home purchase decision involves minimal valuation or math, as homeownership is more about the human than the calculator.

As a professional that values companies, it is very tempting to provide various mathematical perspectives on the pros and cons of homeownership. Still, with homeownership entrenched in our Canadian culture, we should accept and highlight the non-math reasons for and against the home purchase.

Reasons to make the purchase:

• The mortgage is a structured and forced savings plan allowing the generation of net worth

• One has authority to paint the walls, renovate and have autonomy over the space

• One can sell the property without a fixed lease anytime they wish

• Homeownership provides an emotional connection and sense of stability

• Sweat equity can increase the home’s value or make it faster to sell

And a prospective buyer must consider the potential of:

• The buy or sell transaction attract significant fees in the form of title taxes (some provinces), CMHC fees, broker commissions, legal fees and capital gain taxes (if not a qualified principal residence)

• Significant increase in mortgage payments due to interest rates

• Impacted credit rating if they are unable to make mortgage payments

• Costly home maintenance

The First Step, the Down Payment & CMHC

Home prices are growing faster than inflation, and high prices have translated into higher down payments. Assuming a savings rate of 10% of total median household income, it would now take five years to save for the minimum down payment (approximately 6%) on an average home.

According to a CIBC Capital Markets paper in 2021,  parents (and grandparents) are breaking all previous records with cash gifts towards the down payment on first and second homes. With most coming from the Vancouver and Toronto regions, the average gift is now at $82,000. Numerous law firms have responded with blog postings on how to “gift” while protecting the funds from potential future solvency or divorce threats.

CMHC Loan Insurance

The Government of Canada believes that homeownership by Canadians is in the best interest of our country and has created the Canada Mortgage and Housing Corporation to facilitate first-time home purchases. This then facilitates bank mortgages. If the down payment is less than 20%, mortgage loan insurance is required.

A chart outlining the minimum down payments for houses in Canada.

Mortgage loan insurance—of which CMHC is the primary provider—protects the bank if a mortgage payment is not made. It is often referred to as mortgage default insurance. Mortgage loan insurance range from 0.6% to 6.3% of the mortgage.

Current CMHC rates for home mortgages in Canada.

As one can see in the table, CMHC premiums are not insignificant. On a $475,000 home, with 5% down and a resulting mortgage at $450,000, the CMHC cost is $18,000.

Therefore, one should consider strategizing to make a larger down payment. Making the 20% down-payment would cut the CMHC cost in half, saving $9,000.

There are several strategies to consider:

• Have a parent or grandparent gift cash towards the downpayment

• Sell something of value

• Use RRSP savings

• Wait and save a higher down payment

It is important to note that without CMHC insurance, banks carry more risk and charge accordingly (reported on average at 0.3% higher mortgage rates per annum). Therefore, a cost-benefit analysis is worth considering, with a down payment around 18-19% potentially optimal. 

The Home Buyers’ Plan  and RRSP Accounts

To qualify for the Home Buyers’ Plan (HBP), applicants must satisfy several conditions. If they lived in a home that either they or their partner owned over the past four years, they would not qualify for the program. However, even if their spouse or common-law partner has previously owned a property, they may still be considered a first-time home buyer.

In addition to being classified as a first-time home buyer, applicants must also satisfy the following requirements:

• Canadian residence

• Written agreement to buy or build a qualifying home

• Hold an individual Registered Retirement Savings Plan (RRSP)

• Intention to occupy the qualifying home as the principal place of residence within one year of buying or building it

A house on a lake.

The HBP allows first-time home buyers to withdraw funds of up to $35,000 from their RRSP for a down payment, tax-free. It is important to note here that any funds that individuals are wishing to withdraw must have been in their RRSP for a minimum of 90 days—any amount that has not been sustained this amount of time will not be eligible for a tax-free withdrawal. Furthermore, funds utilized in the HBP must be taken out no later than 30 days after a buyer takes possession of their new home. 

For the withdrawal to remain tax-free, those utilizing the HBP must replace the same amount they withdrew from their RRSP in the 15 years following the transaction. Thus, if you chose to withdraw the maximum limit of $35,000, you would have to deposit a little under $200 monthly.

Simply put, if you choose to take advantage of this program, you are required to pay back the equal amount within the 15 years following.

The repayment period starts two years following the initial RRSP withdrawal. For example, if you took money out in 2019, your first year of repayment would commence in 2021. Contributions allocated towards repayment of the HBP will not affect an individual’s RRSP deduction limit—you will still be able to make contributions separate from repayment. Once a contribution has been made, individuals can designate all or part of their deposit towards repayment.

Alternatively, if you fail to repay or underpay your owing HBP balance for the year, any unpaid funds will be treated as a normal RRSP withdrawal; the amount must be reported on your tax forms and taxed as income.

In the end, the HBP is an excellent strategy to boost a down payment and reduce CMHC fees for those that have RRSP accounts and the ability to make the repayments.

The First-Time Home Buyer Incentive

Another government program, which can be used in tandem with the HBP, aimed at helping Canadians acquire enough money to fund the purchase of their new home is the First-Time Home Buyer Incentive (FTHBI). This program exercises all the same eligibility requirements as the HBP and is a shared equity mortgage wherein the government allows you to borrow 5% to 10% of the home’s purchase price towards a down payment.

For example, if the property you are purchasing has a current value of $400,000, you can borrow $20,000 (5%) to $40,000 (10%). However, you are required to pay back the exact same percentage of your home’s future value when you sell it within a 25-year window.

So, if your home increases in value throughout the years, you will owe more than you initially borrowed. Using the example above, if the value of your home increases from $400,000 to $550,000 and you borrowed $20,000 (5%), you will owe $27,500, or $7500 more than you initially took from the government.

calculator

If you are worried about falling home prices, one could use this program to share the downside risk as the repayment would be in a depreciating market. 

Other First-Time Home Buyer Incentives: BC Property Title Transfer Tax 

It is really important to also check your province and related incentives on a first home purchase. For example, in BC there is a property title transfer tax of 1% on the first $200,000 and 2% on the remainder (up to $2M) for residential properties. A first-time home buyer can be eligible for a full or partial exemption on this tax, worth many thousands of dollars.

Conclusions & Planning Advice

Once the home purchase has been decided, planning then begins on the mortgage terms, features, and benefits. A qualified mortgage consultant is recommended as decisions can have material impact to wealth creation. When contemplating government programs such as the Home Buyers’ Plan or the First-Time Home Buyers Incentive, it is also vital to seek advice from experts (like Qube) that possess extensive knowledge on proper program administration, tax expertise, and CRA guidance.

Unencumbered by alternative motivations, Qube will work with you to delve deep into your unique, personal circumstances and investment preferences, consider your specific financial goals, risk tolerance, and ongoing needs. Our team at Qube is committed to providing you with a holistic, diversified, and personalized investment experience. If you would like to learn more, please contact our team.

DISCLAIMER

Qube Investment Management Inc. has authored the material presented above for the promotion of financial literacy and professional development. Qube makes no warranty for the accuracy, validity, or completeness of the above information. It is not intended to provide specific advice with respect to individual financial, investment, tax, legal or accounting matters.

 For advice specific to your situation, consult appropriate investment, legal or accounting professionals.

PLANNING FOR YOUR INVESTMENTS SHOULD NOT BE OVERWHELMING.

Book a quick chat with us to see if we can help you plan for your goals.