Q. I’ve saved $50,000 in my RRSP and now would like to buy my first home. Can I withdraw $40,000 tax-free from my RRSP to use as a down payment? How long do I have to repay these funds? – Nelly A.
A. The government offers all Canadians the Home Buyers’ Plan where first-time homebuyers are allowed to withdraw up to $20,000 tax free from their RRSP. If you buy the home with a spouse or another individual, each is allowed to withdraw up to $20,000 and this money can be used to buy or build a qualifying home. The Home Buyers’ Plan has rules associated with the repayment of the funds withdrawn from the RRSP. You are allowed up to15 years to repay all withdrawals, beginning in the second year following the withdrawal. Each year you are required to repay 1/15 of the total amount withdrawn and in the fall, Canada Revenue Agency will notify you of the amount owing for the next year. You can repay the full amount at any time, however you must make the minimum required repayment each year to avoid having the amount included as taxable income.
Q. My annual income is approximately $40,000 and I have a line of credit of $15,000. Recently I was approved for a mortgage of $130,000 provided I have a down payment of $40,000. What can I do to either save the money for a down payment or how can I qualify for a mortgage with a lower down payment requirement? – Abbas A.
A. When deciding what you can afford to buy, there are four variables to consider: down payment, closing costs, the size of payments you can afford, and the carrying costs on the house.
Lenders look at the combination of these factors in determining what you can afford. Generally lenders recognize that using more than about 32 per cent of your gross household income on housing costs (called Gross Debt Service Ratio) can stretch you to the point where you can get into trouble. Additionally, the total debt associated with housing and other obligations should not exceed 40 per cent of your household’s gross income.
Conventional mortgages are available to home buyers that have at least 25 per cent of the value of the purchase price although it is possible to purchase a home with as little as five per cent for a down payment. In these situations, additional mortgage default insurance is required by the financial institution to cover them in the event of default on payments. Scotiabank offers various options to assist new home buyers getting started. One is the Free Down Payment ® Mortgage where Scotiabank will provide you the required five per cent down payment to purchase a home. There is also a homebuyer savings plan where after six-months of savings you may be entitled to receive a bonus on your savings to use towards a new Scotiabank mortgage. Another option to consider is cash back, where you receive a percentage of your new mortgage amount back in cash which can be used however you choose. It’s wise to shop around and talk to your lender about options that may be available to you.
Visit www.scotiabank.com to get additional tips such as a mortgage calculator to determine how much you would qualify for, tips on borrowing and a homebuyer’s checklist.
Bev Moir is a financial planner with The Moir Team at ScotiaMcLeod in Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member CIPF.
This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.
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