Kirstin is a marketing manager with Community First Credit Union, a division of Your Neighbourhood Credit Union.
Recently, we discussed things you need to be aware of when buying a home – I want to talk specifically about the various options to building your savings for the all-important down payment.
Let’s say you’re a young adult, just establishing your savings plan – with the ultimate goal of, one day, owning a home. The minimum requirement for a down payment is 5% (*The minimum down payment requirement for mortgage loan insurance depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. Mortgage loan insurance is available only for properties with a purchase price or as-improved/renovated value below $1,000,000), with Canada Mortgage and Housing Corporation (CMHC) insuring your Mortgage.
There are a few ways of going about saving this money – I’d recommend using a Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). Each have unique costs and benefits.
RRSP Savings and the Home Buyers Plan – If you are currently, or have considered contributing to an RRSP, there is a program designed to allow you to withdraw up to $25,000 from the plan (without penalty) to put towards a down payment. The plan requires that you repay the amount back to the plan, just as if you borrowed it. If you don’t make repayments over the allowed 15 year period, you would claim 1/15th of the withdrawal as income in the given tax year.
What I like best about this strategy is, you take advantage of your smart investment moves and open an opportunity for another investment. This plays very well into long-term building of your net worth and, if your employer is making matching contributions to your RRSP, you can quickly build up your savings balance.
Running short on your RRSP contributions? It might be worth considering an RRSP investment loan to catch up on unused contribution room. The increased contributions can drastically reduce your taxable income and yield a larger tax refund.
A really smart move would be to contribute that tax refund to your loan – or, contribute the refund to your RRSP’s.
More information on the Home Buyers Plan can be found on the Canada Revenue Agency website: http://www.cra-arc.gc.ca/hbp/
Tax-Free Savings – Similarly to RRSP’s the interest earned on any deposits in your TFSA are exempt from taxation – meaning, your hard earned dollars will receive interest and you will not need to claim the returns as income. Withdrawals from the plan are very simple – there are no penalties, and the funds can move freely from the plan to your down payment without filling out any extra paperwork.
You cannot, however re-contribute the money taken from the TFSA until the following calendar year. And, there is no additional tax benefit for contributing money to your TFSA.
While the TFSA is a great investment vehicle for short or long-term investing; I am of the firm belief that, when it comes to down payments for first time buyers – it’s best to take advantage of the Home Buyers Plan mentioned above.
So, you may be asking yourself, what if I don’t have an RRSP or a TFSA and I’m not very good about saving money – what else could I do?
Well, some Mortgage companies, Banks and Credit Unions will offer a personal loan for your down payment – but I’d caution against this. In addition to making payments for the Mortgage, Property taxes, heat/utilities, insurance – you’re also going to have to make an additional loan payment. If your budget can sustain this – by all means, it’s worth looking into further.
Alternatively, you could also venture in the direction of having a gifted down payment from a family member or really good friend (and trust me, they’d be a very good friend if they are willing to give you money to buy a house). This is becoming more of a norm in the home buying market. With house prices rapidly increasing in the region, you may feel like you’ll be playing a game of cat and mouse – your savings grows, but the price of housing grows too. So, sometimes having Mom and Dad or a grandparent help out, is a great hand up.
Here are some great links to CMHC’s website for more information and tools:
CMHC – Homebuying Step by Step: http://www.cmhc.ca/en/co/buho/hostst/index.cfm
CMHC – Ready, Set, Home App: http://www.cmhc.ca/en/co/buho/buho_018.cfm
** Ready Set Home is a tool to help homebuyers, especially first-time homebuyers, make informed choices when buying a home. Ready Set Home offers tools to guide you to figure out how much you can comfortably afford to spend as well as keep track of all the details during your home buying process.
My recent blogs have focused on purchasing and building new homes. I wanted to pause, re-focus and tackle a topic that is near and dear to my past: buying a house and renovating. I’m going to focus on, specifically, borrowing to accomplish both goals.
First, let me take a moment and explain a little. Typically, you buy a house – you scrimp and save for a down payment, and whatever savings is left you allocate this to your renovation; or maybe you dip into your personal line of credit; or, maybe you apply for a Home Depot/Lowes Department Card. Both seem to be the typical approach to buying and renovating. Though, I propose that there is an easier way to go about this whole project.
I talk a lot about CMHC (Canada Mortgage and Housing Corporation) – they are the folks who insure Mortgages with less than 20% down. They have programs for green financing, new to Canada purchasers, rental properties, vacation/secondary properties – but they also have a fantastic program for renovations. The program is called “Purchase plus improvements” and it deals specifically with Mortgages where the renovation budget is rolled into the balance of the purchase loan.
So, let’s pump the brakes a little here and talk about the reason behind the program. We know that as years go on, home fashions change, home systems age and become less efficient and there just aren’t enough builders and land to be building new homes. If you’ve ever spent a rainy afternoon watching HGTV or the DIY network – you’ll see that renovating a property can significantly change the look and value of the home; and taking this route is becoming more and more popular.
CMHC recognized a shift in the market – there are homes in desirable neighbourhoods that aren’t as desirable as they once were – so they created a program whereby the purchasers are able to finance their renovation project into the balance of their Mortgage. The work these buyers undertake will improve the market value – and CMHC approves the loan to be in excess of the purchase price, but in line with the return on equity with renovations.
Here’s an example of a purchase plus improvements loan we recently completed (names and addresses have been replaced with fictitious ones)
Buyers: John and Mary Smith
Address: 111 Neighbourhood Avenue, Kitchener
Purchase Price: $300,000 Renovation Budget: $30,000
Down Payment: $16,500 (5% down + 5% of renovation budget)
Renovation plans: Remodel main bathroom, paint interior of entire home, replace air conditioner, build deck and replace main level flooring with hardwood
Improved Value: $330,000
Total Loan (net of CMHC Premiums): $313,500
$285,000 for purchase of 111 Neighbourhood Avenue
$28,500 for renovations
Because John and Mary included the renovations in their Mortgage – they avoided having to pull more funds from their savings or borrowing this money from a personal line of credit. They were able to realize the potential of this home by fixing up some of its needs – and now they have the house exactly as they wished. The pre-work they invested into researching the renovation paid off big in the end.
More information pertaining to the CMHC program can be found on their website:
Wondered where to get the biggest bang for your buck on renovations? Here are some great resources:
Kathy McCleary – HGTV: http://www.hgtv.com/design/decorating/clean-and-organize/which-home-improvements-pay-off
Scott McGillivray – HGTV: http://www.hgtv.ca/incomeproperty/article/top-5-renos-for-return-on-investment/
Mike Holmes – HGTV: http://www.hgtv.ca/holmesinspection/article/where-to-put-your-reno-dollars/
As my wife and I do our progress inspections of the new build, we find ourselves getting into discussions about the new furniture and fixtures that will complement the house’s new style. We’ve visited a few different retailers to discuss our options – and we’ve done some research to figure out when is the right time to buy.
I’ve been a little taken back by sticker shock on some items – we want to get a new sectional sofa for our main living space, but I can’t justify spending over $5,000 for a couch, no matter how comfortable it is. The sales associate was on-the-ball noticing my look of dismay, and quickly chimed in that in-store financing was available. Not a bad idea, but not for me.
In my last blog I talked about budgeting, making sure my cash flow matched the needs and wants I had at the time. So while I could forego a little bit of savings to have a really nice couch – it doesn’t make long-term financial sense for me to spend the money now on furniture, and potentially forego years of retirement savings or dip deeper into my emergency savings if something bad happens.
This experience brought forward a few financial tips you may find useful.
Number one: Applying for in-store financing
Credit is important, using credit is important – but using your excellent credit to temporarily finance household goods is detrimental to your credit. Equifax Canada says that up to 15% of your credit score is comprised of the length you have established credit. New credit can hurt your score over the short run. They also note that 10% of your credit score is comprised of the type of credit you own – Mortgages, loans and lines of credit are good; credit cards are okay, in-store financing or prime lending is not so good and can hurt your score over the long-run. So, let’s go back to my situation in the furniture store.
Here I am, sitting on an expensive couch that my wife and I like, we’re feeling the pressure of buying from the salesperson and we need to make a snap decision about money. My best piece of advice, take your time and walk away if necessary. So, that’s what we did.
Number two: Do your research
It turns out, that awesome, expensive couch we were sitting on is manufactured and shipped from the States. As of right now, the Canadian dollar trades at roughly $0.75 USD – so from my perspective, the item is overpriced by 25% just based on the disparity of the currency. If I was buying last summer, this item should have cost much less.
My outlook has changed slightly, now when shopping for furniture, I’m going to ask about Canadian-made items – the pricing is much more competitive, the shipping and manufacturing time is less, and the quality is truly comparable.
Number three, my last point: Compound interest
I mentioned earlier that this type of purchase could significantly impact years of retirement income, and you may have scoffed and thought, “Really Matt, over $50 or $100 a month?”
The truth is, I’m not retiring tomorrow, and my investment time frame will be another 25 to 30 years (depending on the financial decisions I make today). The more I contribute to my savings now, the more opportunity that money has to earn interest; and, that interest earning interest, and so on. A wise man once said, “The greatest tool an investor has in their tool belt is time”, don’t squander the time you have now to plan for your future.
Tools I recommend:
YNCU Retirement Planning Tools: https://www.yncu.com/Personal/ToolsAndCalculators/Calculators/RetirementPlanner/
Equifax Canada: http://www.consumer.equifax.ca/home/en_ca
Follow me on Twitter @matt_at_YNCU for updates and more ways to be financially fit.
Are you buying or building a house? Share your comments and questions with us!