Top 3 Incentives for First-Time Homebuyers

Three Effective Ways to Reduce the Financial Burden of Homeownership

Are you overwhelmed by the cost of homes and wondering how you’ll ever save enough to buy your first home? You’re not alone. While the prospect of homeownership may seem daunting for many Canadians, there are numerous plans, programs, and incentives designed to help first-time homebuyers enter the real estate market.

1. Mortgage Default Insurance

For most people, buying a home outright is impossible without some form of financial assistance. This is where mortgages come in, with the initial partial payment known as a down payment. Estimating the cost of this down payment is simple using a first-time buyer calculator, where you input the home price and the required down payment percentage to see your total down payment amount.

Making the Minimum Down Payment

Traditionally, a 20% down payment was the standard for purchasing a home. However, many lenders now permit smaller down payments, provided the buyer purchases mortgage loan insurance. In Canada, the minimum down payment for homes priced at $500,000 or less is 5%. For homes priced over $500,000 but less than $1 million, the minimum down payment is 5% on the first $500,000 and 10% on the remaining amount. These smaller down payments result in what is called a high-ratio mortgage, which applies only to homes priced at $1 million or less. Homes priced above this threshold still require the standard 20% down payment.

High-Ratio Mortgages and Mortgage Default Insurance

High-ratio mortgages, while making homeownership more accessible, come with an additional cost: mortgage default insurance. This insurance protects lenders against the risk of borrowers defaulting on their mortgage payments. The insurance premium is calculated as a percentage of the loan and can range from 1.8% to 4% of the mortgage amount. These premiums can be paid monthly or as a lump sum, often incorporated into the mortgage payments. This insurance enables buyers to purchase a home sooner without waiting to save a full 20% down payment.

Amortization Period for High-Ratio Mortgages

The maximum amortization period for high-ratio mortgages is 25 years. For those seeking a longer amortization period, a conventional down payment of at least 20% is required. Mortgage default insurance is provided by three major institutions: the Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Sagen.

2. Land Transfer Tax Refunds

Provincial and municipal governments offer land transfer tax refunds and incentives specifically for first-time homebuyers. Recent changes have increased eligibility to individuals with an annual income of up to $150,000, up from the previous $120,000.

Understanding Land Transfer Taxes

Land transfer taxes (LTT) are fees imposed by provincial or municipal governments on property transactions. These taxes are calculated on a tiered rate system, starting at 0.5% on the first $55,000 and increasing with the property value. In cities like Toronto, Victoria, and Vancouver, municipal LTT is also applied, often doubling the tax amount compared to other areas. First-time homebuyers can receive refunds for both provincial and municipal LTT.

Land Transfer Tax Refunds in Ontario and Toronto

In Ontario, first-time homebuyers can receive a provincial LTT refund of up to $4,000, which applies to homes priced at $368,000 or more. This refund reduces the municipal land tax for homes above this price threshold. To qualify, buyers must be at least 18 years old and must not have previously owned a home or held an interest in a home while being a spouse. In Toronto, an additional municipal LTT refund of up to $4,475 is available. These refunds apply to both newly constructed and resale residential properties. Buyers can claim their rebate after registering or within 18 months of registration.

Examples of Land Transfer Tax Savings

For instance, if you purchase an $800,000 home outside Toronto, the blended land transfer tax rate is 1.56%, amounting to $12,475. Subtracting Ontario’s $4,000 refund, the net provincial LTT is $8,475. Conversely, in Toronto, the combined provincial and municipal LTT would be $24,950, reduced to $16,475 after applying both refunds.

3. The Homebuyers’ Plan

Canada’s Homebuyers’ Plan (HBP) allows individuals to withdraw funds from their registered retirement savings plan (RRSP) to buy or build a home. As of April 2024, the withdrawal limit is $60,000, which must be repaid to the RRSP within 15 years. Repayment begins the second year after the withdrawal and can be made in larger amounts or ahead of schedule to reduce the remaining balance.

Understanding RRSPs

An RRSP is a savings account for retirement, where funds grow tax-deferred until withdrawal. This account can also generate interest and be used for various investments, including stocks, ETFs, mutual funds, bonds, and precious metals.

Eligibility for RRSPs

There is no minimum age to start an RRSP, but it must be closed by the end of the year in which the holder turns 71. Eligibility requires having employment income, a valid Social Insurance Number, and filing regular tax returns.

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Homeownership is becoming more expensive, but various programs and incentives make it more attainable for first-time buyers in Ontario. Key points include:

• High-ratio down payments allow for a lower upfront cost, requiring mortgage default insurance.
• First-time buyers can receive substantial refunds on provincial and municipal land transfer taxes.
• The Homebuyers’ Plan permits RRSP withdrawals up to $60,000 for home purchases, with a 15-year repayment period.