Top Five Mortgage Tips For New Home Buyers

Purchasing a home for the first time can be a difficult experience. While searching for the perfect home, many first time buyers neglect to spend the same amount of time when shopping for a mortgage. As offers are made, and real estate agents facilitate the sale of the home, spending an increased amount of time structuring mortgage financing often is a second priority. Spending a little extra time with the mortgage is advised as rates and fees are negotiable and can save new homeowners thousands of dollars over the life of the loan, which could be up to 30 years. The five tips below are helpful for first time homebuyers as they cover areas of real estate financing that are often overlooked.

1) Compare Mortgage Broker and Mortgage Bank Pricing.
There are many direct mortgage lenders that offer competitive pricing and do enough volume where they are willing to work with first time home buyers and offer low rates and fees. Brokers may have access to the same banks and charge additional fees which could be avoided. On the other hand, mortgage brokers work with with many banks and may find you a program that is tailored to your financial situation. Get pricing from both a mortgage bank and a mortgage broker will help you decide which route to go.

2) Do not underestimate Adjustable Rate Mortgage (ARM) products.
Adjustable rate mortgages generally offer lower interest rates than fixed rate mortgages. Depending on the size of the loan, an adjustable rate mortgage can save first time homebuyers thousands of dollars in interest. The fixed period of the loan needs to be taken into consideration as well as prepayment penalties. Additionally, if a first time home buyer plans on moving in a short period of time, choosing an adjustable rate mortgage will reduce monthly mortgage obligations and free capital for savings or a down payment on a future property.

3) Good Faith Estimates are just “estimates”.
Many first time home buyers who are ready to close often find themselves wondering why pricing changes at the closing table. Sometimes interest rates change from the time the rate is locked to the date of the closing. Other times, unscrupulous mortgage professionals will increase the rate to create additional yield spread for themselves or company. In either case, if you are not comfortable with the pricing, do not sign the paperwork. It is within your rights to walk from the closing table if you are unhappy with a newly proposed deal.

4) Obtain a Home Equity Line of Credit
A home equity line of credit operates much like a credit card as there is a predetermined credit line that cannot be exceeded and a minimum monthly payment based on the amount of money used. Depending on the size of the down payment, (usually 20% now) the size of the home equity line of credit will be offered to a borrower if they qualify for it. The home equity line of credit can be delivered to the borrower at the time of closing. Tapping into home equity can be extremely beneficial for major expenses. (home improvements, medical emergencies, etc.)

5) Be Careful with Credit while Mortgage Shopping.
Purchasing a home can be an overwhelming event as there are many new expenses in the near future. At this time, applying for new credit cards can negatively affect your credit score. In turn, a lender may offer you a high interest rate or in the worst case prevent you from getting the loan. Additionally, be timely with all credit card payments during this period.

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Tax Rules for Home Buyers

If you’re one of the many Canadians who dream of home ownership, and you’re working hard to make this goal a reality, you should know that the Canada Revenue Agency has two programs that can help you get there faster.

There is the First Time Home Buyers’ Plan. Because the required down payment on a house purchase can be a stumbling block, the government will actually let you borrow the money to put down on your dream home – from yourself.

Under the rules of this program, you would be allowed to take money out of your RRSP to help buy your home – up to $25,000. This money will remain sheltered from tax, so long as you pay it back within 15 years. This is a great way to put your retirement savings to work for you today, without the considerable tax consequences of withdrawing it outright. The only downside is that you won’t be earning interest on your investment, but that might be outweighed by the interest cost saved by using your own money instead of a loan.

Another helping hand for new homeowners from the CRA is the First-Time Home Buyers’ Tax Credit on your tax return. It’s a non-refundable tax credit that can put money in your pocket by reducing the amount of tax you owe for the year in which you buy your house.

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First Time Home Buyers and RRSP, How to Buy Your First Home With Your RRSPs (Canada Specific)

A person is considered a first time home buyer if he has not possessed a house in the last 5 years. Even if he had earlier owned a house, and there is a gap of 5 years, the person is categorized as a first time home buyer.

Registered Retirement Savings Plan or, RRSPs are a Canadian account which includes the savings as well as investments. The rules are controlled by the Canadian Income Tax Act, 1957. According to the RRSP plan, a certain amount of your taxable income is saved within the plan and in return, the government accordingly, decreases the amount of annual tax you need to pay. RRSP rules regulate the contributions, timely payments, obtaining the contributory tax credit, the numerous permissible assets and the transformation of RRSP to RRIP (Registered Retirement Income Fund). The government has approved the following list of assets.

Account for savings
GICs or, Guaranteed Investment certificates
Various bonds
Mortgages
Mutual funds
Company shares
Finances from labor
Revenue trusts
Overseas funds

According to the Canadian Federal Government, a first time home buyer may obtain money from his/her RRSP for home building/buying purpose. The HBP or, Home Buyers’ plan enables the person to make use of his RRSP money by paying it as a down payment to purchase/build a house. Hence, it saves him/her a lot of tension as well as extra out-of-pocket money.

You must be a Canadian citizen as well as a first time home buyer to avail the HBP. Generally, $25,000 to $50,000 is allowed to withdraw per couple if you are intending to pay it as a down payment for your primary residence. The money is available in RRSP within 90 days preceding the withdrawal. The withdrawal also requires a signed document describing the purpose of the purchase. You may buy it for some disabled relative and you have to establish the fact that the present establishment is better than their earlier dwellings. Purchase of investment as well as rental property is strictly prohibited as per HBP.

The person buying a home has to pay the amount loaned from his/her RRSP within a stipulated time of 15 years. With proper payments of at least 1/15th of the loaned amount per year the buyer is safe from penalties. The penalty here is the tax which is calculated on the difference amount if paid less than the aforesaid payments per year. A buyer can always use RRSP more than once if he/she returns the total loaned amount and again applies for another loan under HBP.

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First Time Home Buyer – RRSP Down Payment Strategy

There is a window of opportunity during January and February of each year where a first time home buyer can utilize this often forgotten strategy and take advantage of their RRSP to increase the down payment for a home purchase and securing your best mortgage.

As you are probably aware, a qualified first time home buyer can withdraw funds from an RRSP for the purchase of a home under the Government of Canada Home Buyer Plan (HBP). There are 6 key points to remember when using an RRSP for a home purchase:
1. You can withdraw up to $25,000
2. The funds must be in your RRSP for at least 90 days prior to the withdrawal under the Home Buyer Plan (HBP)
3. The funds can be withdrawn up to 30 days after the possession date of your home, but not more than 30 days
4. You can make multiple withdrawals in one calendar year under the home buyer plan
5. The funds withdrawn must be paid back over 15 years, calculated as 1/15th of the total amount each year
6. The RRSP repayment starts the second year after the year of the withdrawal

When purchasing a home, the first time home buyer will typically need to give a down payment of 5% of the purchase price and the balance of funds to close the sale (95% of the purchase price) will be made up by way of a mortgage.

This first time home buyer RRSP home buyer plan (HBP) withdrawal strategy is simple and requires a little planning prior to finding the home you wish to purchase. This strategy works best for an individual who is in a high marginal tax bracket and who has unused RRSP contribution room.

Client Example:
A client, Dave is earning $85k per year, has a marginal tax rate of 36% and has an unused RRSP contribution room of more than $25k. He has been saving money, approximately $10,000, that he plans to use as a down payment for the purchase of a home. He wishes to purchase a home for approx $300k. He has been pre-approved for a mortgage of $285,000 but is short of the minimum 5% down payment ($15,000) by $5,000. He would like to purchase a home in the spring: April or May.

In January, Dave visits his local bank and arranges an RRSP Loan for $15,000 (the maximum RRSP withdrawal for a first time home buyer of $25,000 minus his current savings of $10,000) and is approved. He sets up the RRSP and deposits the savings of $10,000 and the additional $15,000 that he received as an RRSP loan.

When Dave files his Income Tax Return for the previous year he will receive a tax rebate. The $25,000 RRSP Contribution will give him a tax credit, with a marginal tax rate of 36%, this would result in an income tax rebate cheque of $9,000.

Dave can then take his income tax rebate cheque of $9,000 and pay down the RRSP loan, resulting in a loan balance of $6,000. Once Dave finds a suitable home, he can withdraw the $25,000 from his RSP and pay off the remaining balance of his RRSP loan. The net balance of funds available to Dave for the purchase of his first home is now 19,000!

By utilizing this, often forgotten, RRSP strategy, Dave has increased his savings from $10,000 to $19,000. He now has more money that he needs, therefore can take a smaller mortgage or use the extra cash to get some furniture for his new home. Would this HBP strategy work for you or someone you know?

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