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 The Home Buyers’ Plan has rules associated with the repayment of the funds withdrawn from the RRSP.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 Each year you are required to repay 1/15 of the total amount withdrawn and in the fall, Canada Revenue Agency will notify you of the amount owing for the next year.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.

Spring House Buying…What Can You Afford?

Q. Our combined household annual income is $120,000. With overtime work, I earn an additional $40,000 each year. My wife and I would like to buy a larger house worth about $350,000 and we will have a down payment of $85,000 with the sale of our condo. Housing prices in our area are booming and we want to jump in before they get out of reach for us. I am concerned, however, as my overtime work is not guaranteed. Does this make sense for us? – Don S.

A. There are two major considerations here, the amount of household debt you can reasonably assume and the type of mortgage you could get based on your proposed down payment.

Most financial institutions use two parameters in determining how much you can afford to borrow: Gross Debt Service Ratio (GDSR) and Total Debt Service Ratio (TDSR). The GDSR is the percentage of your combined gross annual income required to cover payments associated with housing including mortgage, principal, interest, taxes, secondary financing, heating, and 50% of condo fees if any. GDSR should not exceed 32% of gross annual income. The TDSR is the percentage of gross annual income required to cover payments associated with housing and all other debts and obligations such as car loans and credit cards. The TDSR should not normally exceed 40% of your gross income. When determining what works best for your situation, you are prudent to consider only your guaranteed cash flow and ability to manage payments.

Second, the amount that you’re able to put towards your down payment will determine whether you will qualify for a conventional or high-ratio mortgage. Where the mortgage exceeds 75% of the purchase price of the property, which is the case for you ($85/$350 = 24%), it must be insured. Both Canada Mortgage and Housing Corporation (CMHC) and Genworth Financial Canada provide mortgage default insurance to lenders. An insured or high-ratio mortgage will increase your costs since there are application fees and an insurance premium which may be added to your mortgage.

Household debt as a percentage of disposable income has been rising in Canada, although this has been manageable in the current environment of low interest rates and rising incomes. With the prospect of rising interest rates, homebuyers should exercise some caution, especially if they don’t expect a commensurate rise in income. That being said, home ownership debt is often considered ‘good’ debt, as it forces savings and builds equity in an appreciable asset – a home. Since you will need a place to live for as long as you are alive, homeownership is a worthwhile goal. Next week I will address questions about mortgage protection.

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.

Q. Can I use my RRSP to finance either my mortgage or someone else’s mortgage (family or not)? I would therefore treat my RRSP as a mortgage lender and my RRSP would receive the principal and interest, allowing me to earn a market-based rate on my RRSP. – Philippe T.

A. Your self-directed RRSP can be used to invest in a non-arm’s length first mortgage held on a Canadian principal residence (i.e. your own home or that of someone related to you), provided you have sufficient assets in your RRSP to make the program cost-effective. If your mortgage qualifies under the rules, you can hold the mortgage in your RRSP and withdraw the off-setting funds. In this way, the mortgage is a fixed income asset in the RRSP. As the mortgage must be set up at prevailing rates, your RRSP may be able to earn a better rate of return than what is available from other fixed income investments. Despite these obvious advantages, there are other considerations to determine if this makes good financial sense. The mortgage interest rate and other terms must reflect normal commercial practices, adding to the overall cost. There are fees for set-up, appraisal and legal services, plus ongoing annual administration fees to consider. To determine if this is a good strategy, compare the rate of return on the mortgage, additional costs, and the rate of return on alternative investments.

Q. My husband and I want to buy a condo this spring and we’re trying to stretch our dollars to buy the home of our dreams. How can we maximize our down-payment? – Sally A.

A. If you and your spouse are first time homebuyers, the Federal government allows you each to withdraw up to $20,000 from your RRSP under the Home Buyers’ Plan. No tax is withheld on the withdrawal, however, the funds must be repaid in annual minimum amounts over the next 15 years beginning in the second year of your home ownership. Also, the Home Buyers’ Plan only applies to a principal residence located in Canada and you cannot have owned a home, or lived in a home owned by your spouse, in any of the five years prior to the time of withdrawal of funds. In addition to repaying the money over the next 15 years, the money is due within 60 days of each year end and, if repayment is not made, the amount is added to your annual income and becomes taxable. In the fall of each year, CRA will send you an annual repayment statement called ‘Statement of Account—Home Buyers’ Plan,’ that will indicate the amounts repaid, the balance remaining, and the repayment required for the next year.

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.

Q. My husband and I have saved $12,000 towards the down payment of a new home. We are concerned about qualifying for a mortgage from the bank because we both have a bad credit rating. Any advice? – Jannes C.

A. Your question raises two points – the significance of a $12,000 down payment and the effect of having bad credit on obtaining a mortgage.

$12,000 Down Payment
Under the rules that govern mortgage lending, down payments of 25% or greater of the purchase price of your home will qualify for a conventional or uninsured mortgage. A down payment of less than 25% requires that your mortgage be insured by Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial. This can cost up to 2.75% of the purchase price of the home.

If the $12,000 equals 25% or more of the purchase price, then you require a conventional or uninsured mortgage. As such, only the credit requirements of the lender would apply. With a down payment of 25% or greater, you have a more significant stake in the property and therefore have more to lose in the event of a default on the payments. In general, lenders will place less significance, or may excuse past credit problems, with a larger down payment.

In most areas, $12,000 would be less than 25% down payment, and in fact may only satisfy the minimum 5% down payment required for an insured mortgage. In this case, applicants must then satisfy the credit requirements of both the lender and the mortgage insurer. The smaller down payment would not be assessed as positively on the mortgage application and therefore may be insufficient to overcome your issue of bad credit.

Bad Credit:
I need to clarify what is meant by ‘bad credit.’ A ‘bad credit rating’ could arise through late payments on loans or credit cards or, more seriously, due to problems such as: repossessions, accounts written off by creditors as uncollectible, past mortgage defaults, or bankruptcy. Minor late payments in the past, if explained, will usually have no negative effect. On the other hand, major defaults and bankruptcy constitute ‘bad credit’ that will impede the ability to obtain a mortgage.

To overcome the negative effect of major ‘bad credit,’ an applicant should demonstrate the following:
-approximately two years (and sometimes as much as six years) to have passed from the date of bankruptcy discharge, before a mortgage request will be considered. This much time is considered necessary to re-establish stability of income, overcome the reasons for the bankruptcy, or to re-establish credit or demonstrate the financial discipline to accumulate a pattern of savings.
-the reasons for the bankruptcy no longer exist.
-the mortgage lender would be looking for demonstrations of re-established financial responsibility over a reasonable time, in general at least a year or longer.

Bev Moir is a financial planner with The Moir Team at ScotiaMcLeod in Toronto.

This article is for information purposes only. It is recommended that individuals consult with their own 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.

Q. I’ve been renting a small apartment for years, but now want to consider purchasing a condominium. I don’t know exactly how much I can afford, but I understand there is a formula to figure it out, is this true? – Carol L.

You’re correct! There is a formula that most lenders use to determine how much of a mortgage you will qualify for. Lenders generally approve you for a mortgage if the percentage of your gross annual income required to cover housing payments (mortgage principal and interest payments, property taxes, heating costs and 50% of condo fees) does not exceed 32% of gross annual income. This figure is called the Gross Debt Service Ratio. As personal lifestyle choices affect your monthly cash flow, it’s important to consider your fixed and discretionary monthly expenses when deciding how much mortgage debt you can afford to assume. The Mortgage Quick Qualifier tool at www.scotiabank.com will give you a good idea how much of a mortgage you will qualify for. Depending on your rent situation, a few dollars more per month may just allow you to become a homeowner!

Q. What is a reasonable amount for a down payment on a home purchase? We want to avoid paying for mortgage insurance, but we don’t want to stretch ourselves too much either? – Debra and John F.

A. These days there is more flexibility in borrowing options as financial institutions are lowering the amounts required for a down payment and, in some situations, providing qualified home buyers with the minimum down payment required. . The traditional down payment of 25% of the purchase price of the property qualifies you for a conventional mortgage and, in this case, mortgage insurance is not required. If the value of the mortgage exceeds 75% of the appraised value of the property, this would be considered a high-ratio mortgage and must be insured by either Canada Mortgage and Housing Corp. or a private insurer at an additional cost. If you haven’t yet saved the minimum down payment for a conventional mortgage but your cash flow is strong and secure, you can get into the home you want now by taking a high ratio mortgage to take advantage of prevailing low interest rates.

Bev Moir is a financial planner with The Moir Team at ScotiaMcLeod in Toronto.

Always consult a financial advisor before making decisions based on the advice above. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.