Feberal Budget 2024 Provides Incentives For First Time Home Buyers

 The April 2024 Federal Budget in Canada has provided two incentives for First Time Home Buyers (FTHBs).

The first allows FTHBs to buy new construction with less than a 20% downpayment and have a mortgage amortized over 30 years. This allows for lower payments and allows the borrower to qualify for a slightly higher mortgage amount.

The second incentive, increased the amount a FTHB can take from their RRSP to use towards the purchase of a home from $35,000 to $60,000 and for a married couple this could provide up to $120,000 for the purchase. Additionally the first repayment does not start for five years if the withdrawl is made before December 31, 2025.

First Time Home Buyers Savings Account (FHSA)

 

There will be a new First Time Home Buyer Savings Account (FHSA) available in Canada this year, a great opportunity for current renters and young adults that have never owned a home to start contributing and saving tax free for their down payment.   This could be a great opportunity to work with your financial advisor partners to find new home buyers, or help parents find additional money to contribute for their children.

 

The First Home Savings Account (FHSA) is coming as early as April 1, 2023 in Canada, giving first time home buyers the benefit of an RRSP and TFSA combined to help save for their first home.

 

Here are some of the benefits:

 

• Contributions are tax deductible
• Withdrawal to purchase a home is non-taxable
• Growth is tax free
• Max. $40,000 contribution room
• Max. $8000 contribution per year, beginning 2023, including carry forward amount (excess charged 1% penalty each month)
• Ex. $5000 contributed in 2023, max. allowed in 2024 would be $11,000 ($8000 plus $3000 carry forward)
• Like the TFSA, carry forwards only accumulate once the FHSA is opened.
• Must be min. 18 years old, max. 71 years old and Canadian resident
• Must not have owned a home in which they lived at during any part of the calendar year or any time in the previous 4 years.
• Can make the withdrawal within 30 days of moving in
• Can not use funds with a partner that is not a first time home buyer
• 15 years to grow and use funds for buying a first home
• Can hold multiple FHSA, total cannot exceed $40,000.

 

What Happens if you don’t use your FHSA?

 

• Withdraw your funds and pay tax at your applicable tax rate, or transfer to your RRSP or RRIF tax free and pay tax on withdrawal at retirement income tax rate
• Transferred funds do not reinstated the contribution room of the FHSA
• Transferred funds into an RRSP do not reduce contribution room, nor are they limited by their available contribution room.

 

Can you carry forward Undeducted Contributions?

 

• Yes, like an RRSP, you can carry forward indefinitely and deduct contributions in later tax years.

January 2023 Rate Increase by The Bank of Canada

The first announcement by the Bank of Canada in 2023 saw a 1/4% increase to their rate, that will now pushed the prime lending rate and most lending institutions to 6.70%. This means the rate on a home owners variable rate mortgage and line of credit will be more expensive. Time will tell if this latest increase along with all the hikes last year will slow down the rate of inflation which was 6.3% in December compared to the target rate of 2.0%

What is a trigger rate and should I be concerned if I have a variable rate mortgage?

If you have a variable-rate mortgage, the recent rate hikes by the Bank of Canada will have a direct and immediate effect on your mortgage – and you could be at risk of reaching your trigger rate. Not all variable-rate mortgage holders have to worry about trigger rates.

Each mortgage payment is made up of two parts: principal and interest. The principal is the portion of your payment that goes toward your balance owing, while interest is the bank’s fee for letting you use their money.

To help keep things predictable, many lenders offer variable-rate mortgages with fixed payments. Instead of changing the size of your payment every time the prime rate changes, your lender will continue to collect the same amount and allocate a larger or smaller portion of your payment to interest. If you have a variable-rate mortgage with adjustable payments, you have nothing to worry about. But if your variable-rate mortgage has fixed payments, rising interest rates can cause trouble. As your mortgage rate rises, a larger portion of your payment is put toward interest and a smaller portion of your payment goes toward principal.

Your trigger rate is the point at which your regular payment is no longer enough to pay all of the interest.  Your entire mortgage payment is going to interest and none of it is going to your principal.

When you exceed your trigger rate the balance on your mortgage may begin to increase and not decrease as would be your original plan. Because your regular payment is no longer enough to cover the cost of borrowing, the entire payment is applied to interest. This is called “negative amortization.”

If your payment changes when the interest rate changes, as is the case with many mortgages, you don't need to worry. If your payment does not change then you need to be aware that your lender could be adding money to the balance of your mortgage and at some point, you may get a call to reduce the balance and or increase the size of your payments.

Variable rate mortgages have been a great way to save interest over the long term. Right now with the unanticipated increase to prime, you need to know if the rate increase has longer term negative effects for you.

 

  

Preparing For Power Outages

 

As we approach the winter months, power outages can present a big problem when it comes to keeping your furnace running. There are many ways to get power from a free standing gas powered electrical generator into you home. This is not one of them.

Financing the buyout of the marital home after a “Grey divorce”

 

In 2021, there were more than 1.6 million divorced people between the ages of 55 and 89 years old in Canada. This phenomenon, commonly known as “Grey divorce”, is defined as those over the age of 55 going through a divorce. For many of these individuals, staying in the home they love is a priority, but they may not have the funds on hand to finance a buyout.

If you lack the means to generate new wealth or face difficulties borrowing due to a lack of employment income, it can be tempting to dip into your retirement savings or investments to cover the cost of a home buyout. However, there is a better solution.

For those looking to finance the buyout of their marital home, a reverse mortgage may be the answer. A reverse mortgage could help you tap into the equity you’ve built in your home to buy out your spouse’s half of the home. With a Reverse Mortgage, you can access up to 55% of the value of your home and turn it into tax-free cash. What’s more, there are no monthly mortgage payments, which can help free up additional cash, which you can use to pay for renovations, cover medical expenses, or pay down debt. How you choose to use your funds is up to you.

Big life events like divorce are challenging. Please don’t hesitate to contact me to learn more about how a Reverse Mortgage can make a difficult time a bit less challenging.

Bank of Canada Rate Announcement

We knew it was coming. The Bank of Canada increased the Bank of Canada rate by another 1/2% this week, and this will push the prime lending rate at Canadian Banks from 5.45% to 5.95% and that will directly affect those home owners with variable rate mortgages and secured lines of credit. We will have to wait a couple of days to see if the bond market follows and that could push fixed rate mortgages even higher. Between now and the end of the year, The Bank of Canada has one additionally scheduled rate announcement and it is widely believed that the next announcement could bring another 1/2 to 3/5% increase. These increases are intended to slow down inflation and that could take up to a year for us to see whether these increases have done the job.