FIRST TIME HOME OWNERSHIP
Both the government of Canada and the Ontario government have established programs to assist first time home buyers. The two best known programs are the RRSP Home Buyer’s Plan and the Land Transfer Tax rebate.
In addition to information about the programs to assist first time home buyers, we have also added a paragraph with tips. If you are buying a home, your real estate sales representative can help you find the right type of home at the right price, prepare your offer to purchase, and present your offer to the seller. In most cases, there is no direct cost to you for these services.
RRSP HOME BUYER’S PLAN
The RRSP Home Buyer’s Plan (HBP) was introduced by the federal government, and allows first time home buyers to withdraw up to $20,000 from their RRSPs tax free to use towards the purchase of a home.
To qualify as a first time home buyer, purchaser must not have lived in a home owned by himself or his spouse in the last five years. If both you and your spouse qualify under the Plan, you can each withdraw up to $20,000 from your RRSPs for a total of $40,000.
Before you are entitled to withdraw the money from your RRSP, you must have entered into a written agreement to purchase or build a home that you intend to occupy as your principal residence. The purchase of a cottage, for example, would not qualify for this program because it is not a principal residence.
Money can be withdrawn from your RRSP provided it has been in your RRSP for at least 90 days. If you have signed an Agreement of Purchase and Sale and you have at least 90 days until your closing, you can open an RRSP and make a contribution, receive the tax deferred benefit and then withdraw the same money and put it towards the purchase of your home.
Money withdrawn under this federal program must be paid back to your RRSP within 15 years. People generally deposit one fifteenth of the amount withdrawn back to the RRSP over each of the following 15 years. If you do not pay the full amount back to your RRSP within 15 years, the amount outstanding will be subject to tax when you file your income tax return in the following year.
What if you don’t have any money in your RRSP?
Do not worry; you can still take advantage of the Home Buyers Plan (HBP). If you are earning income, or have earned income in the past few years, you are entitled to contribute to an RRSP. What is not very well known about the HBP is that you can contribute to an RRSP retroactive. Therefore, check to see what your RRSP contribution limit is. It is shown on your previous years Notice of Assessment, or call Revenue Canada.
If you need help raising a down payment, the HBP may be of some use to you. If there are significant unused contributions from previous years, take out a short-term RRSP loan to cover them. After 90 days, you repay your loan by cashing in your RRSP and you use your tax refund for the down payment on your new home.
A tax refund is an acceptable down payment if it is in hand at the time of closing.
For general information about Registered Retirement Savings Plans (RRSP), visit the website of Canada Customs and Revenue Agency.
MUNICIPAL LAND TRANSFER TAX REFUND
As a taxation measure granted under the City of Toronto Act,2006, Toronto City Council approved a new Municipal Land Transfer Tax effective February 1, 2008 that will be applied to purchases on all properties in the city of Toronto in addition to the Province’s Land Transfer Tax.
You may be eligible for a rebate of the MLTT if you are a first-time purchaser of a newly constructed or re-sale residential property with two or less single-family residences. The rebate for first-time purchasers is up to a maximum of $3,725.00.
For information about the refund, visit the website of the City of Toronto.
PROVINCIAL LAND TRANSFER TAX REFUND
In the 2007 Ontario Economic Outlook and Fiscal Review, the government proposed to expand the Land Transfer Tax Refund Program to include first-time homebuyers of resale homes for agreements of purchase and sale entered into after December 13, 2007. This measure was included in Bill 44, Budget Measures and Interim Appropriation Act, 2008, and, having received Royal Assent on May 14, 2008, is now law.
As a result of this change, first-time homebuyers of resale homes may now be able to receive a refund from the provincial government of up to $2,000 of the land transfer tax paid.
To qualify for a refund:
You must be at least 18 years old;
You cannot have previously owned a home, or an interest in a home anywhere in the world;
Your spouse cannot have owned a home or an interest in a home anywhere while he/she was your spouse.
The maximum refund is $2,000 and qualifying purchasers must apply for the refund no later than 18 months after registration of the home if they do not receive the refund at the time of registration.
For information about the refund, visit the website of the Ontario Ministry of Finance.
TIPS FOR FIRST-TIME HOME BUYERS
From the moment you think about buying a home, start planning. One of the first steps on the road to purchasing a home is to save money for the down payment. Most people finance the purchase of their homes with a mortgage loan. Traditionally, financial institutions would only give mortgage loans for up to 75% of the value of the home, and therefore required a 25% down payment on the purchase of a home. However, with mortgage insurance, you can now obtain a mortgage loan for up to 95% of the value of the home with as little as a 5% down payment, for a home worth up to $300,000.
To qualify for a mortgage loan, you will be subject to a credit check. Request a copy of your credit report. Carefully examine it for errors, and clean it up before you talk to a lender. For at least one year prior to purchasing a home, you should ensure that every credit card invoice, rent cheque, car payment and other debt is paid in full and on time.
If you are you currently renting, check your lease for an early termination clause. If you’ll be subject to penalties, try to time your closing with the expiration of the lease.
It’s smart to ask your lender to pre-approve, rather than pre-qualify you for a mortgage. Pre-qualification only tells how much you can afford. Pre-approval goes a step further. Although not a final loan commitment, the pre-approval letter can be shown when bidding on a home. This information is important to the sellers since they do not want to accept an offer that is likely to fail because financing cannot be obtained. Once you determine how much you can afford to pay for a home, try to stay within your budget.
Look at many homes, including an assortment of types of homes. When you view a property, list the positives and the negatives. Don’t stop your inspection at the property line. Examine the surrounding area. Is it safe, well maintained and moderately quiet? Is it convenient to work, schools and shops? Ask about zoning and that vacant lot across the street.
When you decide on a lender (a bank, your credit union, or a mortgage lender) and a mortgage, get every detail in writing, in particular, the lock-in rate, privileges and fees.
Read all the documents related to the purchase of the property, and have a professional review them. You’re signing a binding, legal document.
Ready to go house hunting? I will gladly explain the options, and provide you with information detailing current market conditions, financing options and listings of available homes for sale.
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