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14 Mar

Your down Payment

General

Posted by: Sarah & Jonathan

The next few posts will be geared towards first time home buyers, today talking about down payment the Home Buyers’ Plan & mortgage default insurance (CMHC).

The minimum Down Payment required for the purchase of a house is 5%, though the minimum may be higher based the purchasers’ circumstances.  This can come from an individuals’ savings, investments, sale of another property, gifted (from a close family member) or in certain circumstances can be borrowed.  In most circumstances, if the down payment is pulled out of an individuals’ RRSP, this amount would be treated as taxable income, however if the they qualify as a first time home buyer, this can be taken tax free.

(First time) Home Buyers’ Plan – this is where the individual is taking money from their RRSP to use for the down payment or closing costs for the purchase of a home.  A few criteria must be met to qualify:

1 – Must qualify as a first time home buyer

2 – Money being used must be in the RRSP account for minimum of 91 days.

This money can be removed without being treated as taxable income.  It then needs to be paid back to the RRSP account in equal installments over 15 years, beginning 2 years after the home was purchased.  If this is not paid back in one particular year, the money for that year will be treated as taxable income. (as an example, if $15,000 is taken out in 2013 under this program, beginning in 2015, $1,000 must be repaid to the RRSP account.  If in 2017, the $1,000 is not repaid, then this amount will be treated as taxable income for this year).

The limit per home buyer is $25,000, so if a couple is buying a home and both are first time buyers, each can remove up to $25,000, so a total of $50,000.  If one person is a first time home buyer and the other is not, the first time home buyer can still use the program.

Mortgage default insurance – Commonly known as CMHC, is the insurance premium which is added to the mortgage should the buyer not have a minimum of 20% down payment (please note, there are circumstance where more than 20% may be required).  CMHC is one of the insurers, though they are not the only ones (Genworth & Canada Guarantee are the other two).  The premium is a percentage of the loan, and the percent decreases as the down payment increase.  This is added to the mortgage & amortized over the life of the mortgage.

These premiums are transferable, so if you are selling a house with an insured mortgage, and subsequently purchasing a new one (where the new mortgage will also be insured), your mortgage broker can apply to have the default insurance moved from one home to the next.  If the mortgage is increasing in value, there will be some costs, however there could be thousands of dollars in savings compared to paying the full premium.