It is Your Time To Shine

 

As we roll into August, it’s an exciting time for first-time homebuyers in Canada. With several pivotal changes now in effect, the dream of homeownership is more attainable than ever.

The newly enhanced Home Buyers’ Plan now allows a significant increase in the amount you can withdraw from your RRSPs—from the previous $35,000 up to $60,000. This adjustment is a game-changer, especially considering the steep climb in down payment requirements in recent years. The best part? You get a five-year grace period before you need to start repaying, giving you ample time to stabilize financially in your new home.

For those considering a brand-new build, there’s more good news! 

First-time buyers can now benefit from a 30-year amortization on insured mortgages, up from 25 years. This extension can substantially lower your monthly mortgage payments, making it easier to manage other expenses or save for future plans.

Alongside all of this positive change, the financial landscape is also evolving for the better (even if it doesn’t feel like it just yet). Interest rates are beginning to stabilize and even drop slightly. This presents a unique window to secure a mortgage at a potentially lower rate, which could save you significant amounts over the long term.

But why is this timing so crucial? With the Bank of Canada’s current trajectory toward normalizing rates, jumping in now could secure you a better deal before rates climb again. As inflation begins to cool off and economic conditions stabilize, the housing market is expected to become increasingly competitive once more.

This period marks a potentially ideal entry point for first-time buyers. Lower rates, beneficial government programs, and the prospect of less competition offer a less daunting path to homeownership. Whether it’s the reduced monthly payments from longer amortizations, the tax-efficient use of your RRSPs for down payments, or the overall favourable borrowing conditions, now is a time ripe with opportunity.

If you’re on the fence about purchasing your first home, consider this your sign to take the leap. Let’s discuss how these changes can benefit you and get you started with the pre-approval process. Connecting now could be your first step toward turning the key in the door of your very own home!

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.

 Reverse Mortgage Options

 Of all the before and after renovations photo's this would be my favourite. It is from a segment on a show with the host Scott McGillvery on HGTV

More than 99% of British Columbians are exempt from the speculation and vacancy tax, but all residential property owners in the taxable regions must declare to receive their exemption. If you aren't eligible for an exemption, you may be eligible for a tax credit to reduce the amount of tax you pay.
This year, the speculation tax has been increased from 0.5% to 2.0% for foreign owners and satellite families, and there are new exemptions for properties only accessible by water.
The declaration forms have been mailed out and have to be completed by March 31, 2020.

Who Can Benefit From The First Home Buyer Tax Credit

The Home Buyers Tax Credit has become the Home Buyers Program.
The Home Buyers’ Tax Credit (HBTC) is a non-refundable credit that allows first-time purchasers of homes, and purchasers with disabilities, to claim up to $5,000 in the year when they purchase a home.

To be eligible for the Home Buyers’ Tax Credit, you must meet both of these criteria:

1. You or your spouse or common-law partner purchased a qualifying home.
2. You are a first-time home buyer, which means that you did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years.

As an example of the latter, if you acquired a home in 2019, you must not have owned a home in the previous 4 years.
Additionally, persons with disabilities are eligible for the HBTC, even if they are not first-time home buyers. A person with a disability is defined as someone eligible for the disability tax credit. To be eligible, the disabled person must purchase the home for the purpose of living in a home that is more accessible or better suited to their needs.
If you have family members who are disabled, you may purchase a home for them and claim the credit yourself. The home must be one that is better suited to the condition of that person. For you to claim the credit, the disabled person must be a relative, defined by the Canada Revenue Agency as an individual connected by blood relationship, marriage, common-law partnership, or adoption.

Which Homes Qualify for the HBTC?

A qualifying home is almost any type of home as long as it is located in Canada and registered in your or your spouse or common-law partner’s name. This includes existing homes and homes under construction.

According to the CRA, the following are considered to be qualifying homes:

• Single-family houses
• Semi-detached houses
• Townhouses
• Mobile homes
• Condominium units
• Apartments in duplexes, triplexes, fourplexes, or apartment buildings

A share in a housing cooperative also qualifies if it gives you the right of ownership of the underlying property.

How to Claim the Home Buyers’ Amount

• To claim the Home Buyers’ Tax Credit, enter the amount of $5,000 on Schedule 1 line 369 of your tax return.
• For 2019, the tax credit rate of 15 percent means the actual reduction of your taxes will be $750. If your federal taxes are less than $750, your credit will be reduced accordingly since it is a non-refundable credit.
• You can divide the credit between your return and your spouse or common-law partner’s return, but the combined total claimed cannot be greater than $5,000.
• If you are claiming the HBTC for a home purchased for a disabled relative, enter the amount on the same line on your tax return. You may be asked by the CRA to explain how you are related to the disabled person.

Know Your Words – Mortgage Words, that is

Buying a home is a big investment. With so much at stake, it’s important learn what you can about the homebuying process as well as understanding the “language” of mortgage lending.

A recent survey conducted by the Financial Consumer Agency of Canada, and the Bank of Canada in 2019 suggested that homeowners don’t have a good understanding of the terminology used in mortgage lending. A large percentage -- 74% of homeowners or soon-to-be homebuyers -- did not fully understand what a mortgage term or amortization period were.

So, to help you better understand what you’re getting into, here is a partial list of terms to increase your mortgage knowledge.

• Adjustable Rate Mortgage (ARM): A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. The interest rate resets based on the lender’s Prime rate plus or minus a variance. With most ARM mortgages, different from VRM mortgages (variable rate mortgages) the mortgage payment adjusts automatically with each change in interest rate.
• Adjustment Date: A date used by the borrower and lender to move payment dates to a schedule that suits the borrower. Between the funding date and the adjustment date, the borrower typically pays interest only vs. principal and interest.
• Amortization Period: The number of years over which you have to repay a loan. The most common period is 25 years for a first-time homebuyer.
• Benchmark Rate:  A qualifying rate set by the Bank of Canada and can be adjusted at any time.  All insured and insurable mortgages must meet the standard affordability tests (Gross Debt Service and Total Debt Service) “as if” the interest rate is the Benchmark Rate. Also referred to as a “stress test”.  Designed to ensure that borrowers and the housing market can sustain higher interest rates.
• Bridge Financing: (Also referred to as Interim Financing) A loan against a property being sold allowing the owner to use their equity to purchase a new property and take possession of the new property before the Closing Date of the sale.  There must be a firm sale of the property being sold.
• Closed Mortgage: A mortgage whose term cannot be altered until maturity, unless the lender agrees and the borrower agrees to pay a fee called a pre-payment penalty.
• Collateral Charges: Unlike a standard mortgage, a collateral charge is often re-advanceable, meaning the lender can lend you more money after closing without you needing to refinance and pay a lawyer. A collateral charge may not be transferable -- it cannot be assigned (switched) to a new lender like a regular mortgage.
• Deposit: Money placed under the care of a third party (real estate representative, lawyer or notary) by the purchaser when he makes an Offer to Purchase. The money is paid to the vendor upon closing the sale or returned if the conditions are not satisfied. This is typically held in trust.
• Downpayment: The part of the home purchase money that is not paid out of the mortgage loan.
• Equity: The total value of the owner’s interest in a property, calculated as the value of the home less the total outstanding obligations.
• Fixed Rate Mortgage: A mortgage for which the rate of interest is fixed for a specific period of time (See term).
• Gross Debt Service Ratio (GDS): The percentage of the borrower’s gross monthly income that is used for monthly housing payments (principal, interest, taxes, heating costs, and half of any condominium fees).
• HELOC: A home equity line of credit (pronounced hee-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house. These are often re-advanceable.
• Insurable Mortgage: This type of mortgage can now be considered the new “insured mortgage”. These are still eligible for default insurance but may be portfolio-insured at the lender’s expense or high-ratio insured at the client’s expense.
• Insured Mortgage: A mortgage transaction where the default insurance premium is paid by the client, as is typical in a high-ratio mortgage. 
• Interest Rate Differential (IRD): A compensation charge that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges, usually in a fixed-rate mortgage.
• Loan-to-Value: The amount of the mortgage loan compared to the value of the property.
• Monoline Lender: Monoline lenders focus on just mortgages as opposed to banks and credit unions which offer a variety of services. 
• Mortgage Default Insurance: If you have a high-ratio mortgage (more than 80% of the lending value of the property) your lender will probably require that you purchase mortgage loan insurance, which is available from CMHC, Genworth Canada or Canada Guaranty.
• Mortgage Life Insurance: Provides coverage for your family should you die before your mortgage is paid off. This insurance can be purchased through your mortgage professional.
• Open Mortgage: Allows the borrower to pay any amount of the principal, including the entire balance, off at any time without penalty. You may pay a higher interest rate for the flexibility of an Open Mortgage, but perhaps warranted if a sale is anticipated or in the case of buying property to fix up and sell.
• Portable Mortgage: A mortgage with an option that allows a buyer to transfer a current mortgage to a new property. (Subject to full borrower and property approval)
• Qualifying Rates: The rate used to qualify a borrower for a mortgage. Lenders use these rates to calculate your debt-service ratio, which is the ratio between your debt and income. This serves as a gauge of your ultimate ability to repay the obligation over the life of the mortgage.
• Stress test and Stress Test Rate: Similar to Benchmark Rate and used for uninsurable mortgages. The Stress Test rate is the higher of the contract rate plus a government defined increment, currently at 200 basis points, or the current Benchmark Rate. All uninsurable mortgages must meet the standard affordability tests (Gross Debt Service and Total Debt Service) “as if” the interest rate is the Stress Test rate. Designed to ensure that borrowers and the housing market can sustain higher interest rates.
• Term: The length of time that mortgage conditions, including the interest rate you pay, are in effect. At the end of the term, the borrower (you) can pay off the mortgage or renew for another term. Mortgage terms can range from six months to ten years; the most common is 5 years.
• Un-insurable Mortgage: These mortgages are not eligible for default insurance and apply to refinances, rental properties, stated income clients, and on purchases greater than $1M.
• Variable Rate Mortgage (VRM): A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.  The interest rate resets based on the lender’s Prime rate plus or minus a variance.  With most VRM mortgages, different from ARM mortgages (Adjustable Rate Mortgage), the mortgage payment does not adjust automatically change with each change in interest rate.  The lender typically reminds you that you may adjust the payment by contacting them. 

Of course there are more, but these seem to be the ones that homebuyers often ask about. If you need clarification or have question, contact your mortgage professional.