Area of Law: Real Estate Law
Answer # 402
First-time home buyer programsRegion: Ontario Answer # 402
The Government of Canada has three programs to assist first-time home buyers – the Home Buyers’ Amount tax credit, the Home Buyers’ Plan (HBP), and the First-Time Home Buyer Incentive. In addition to these federal programs, most provincial governments offer land transfer tax refunds to first-time home buyers. As well, mortgage loan insurance is available from Canada Mortgage and Housing Corporation (CMHC).
Home Buyers’ Amount tax credit
The Home Buyers’ Amount tax credit (formerly known as the First-time Home Buyers’ Tax Credit) exists to assist first-time home buyers with the costs associated with the purchase of a home, such as legal fees, disbursements and land transfer taxes. The HBA is a $5,000 non-refundable income tax credit amount on a qualifying home acquired after January 27, 2009. For an eligible individual, the maximum credit amount is $750. You are considered eligible if: 1) you or your spouse or common-law partner acquired a qualifying home; and 2) you did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years.
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan allows first-time home buyers to withdraw up to $35,000 from their RRSPs on a tax deferred basis to use toward the purchase of a home in Canada. To qualify as a first-time home buyer, purchasers must not have lived in a home owned by themselves or their spouses or common-law partners in the preceding four-year period outlined by CRA. The four-year requirement is waived where the purchase is for a more accessible or suitable home that will be occupied by an individual eligible for the disability credit.
If both you and your spouse or common-law partner qualify under the Plan, you can each withdraw up to $35,000 from your RRSPs for a total of $70,000. 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 or a commercial property, for example, would not qualify for this program because they are 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Money can be withdrawn from your RRSP provided it has been in your RRSP for at least 90 days.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 toward 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.
First-Time Home Buyer Incentive
To be eligible for the First-Time Home Buyer Incentive, home buyers must:
- be a first-time home buyer,
- be a Canadian citizen, permanent resident or non-permanent resident authorized to work in Canada,
- earn less than $120,000,
- have the minimum qualifying down payment, and
- the total borrowing amount is limited to 4 times the qualifying income
For those who qualify, the Government of Canada will provide:
- 5% of a first-time home buyer’s purchase of an existing home with a purchase price of $200,000, or $10,000. If the home value increases to $300,000 the payback would be 5% of the current value or $15,000
- 5% or 10% of a first-time home buyer’s purchase of an existing home with a purchase price of $200,000, or $20,000 and the home value decreases to $150,000, the repayment value will be 10% of the current value or $15,000
Type of Property
- Purchasers of existing homes are eligible for the incentive amount of 5%.
- Purchases of new construction homes are eligible for the incentive amount of 5% or 10%.
- Purchasers of new and existing mobile/manufactured homes are eligible for the incentive amount of 5%.
Repayment: Home buyers must replay the incentive after 25 years or when the property is sold, whichever is earlier.
For more information, visit the Government of Canada, First-Time Home Buyer Incentive.
Mortgage loan insurance
In Canada, home buyers must purchase mortgage loan insurance, also known as mortgage default insurance, when the down payment on their new home is between 5% (the minimum amount it can be) and 20% of the purchase price.
Available from the Canada Mortgage and Housing Corporation (CMHC), mortgage loan insurance helps protect the lender against mortgage default, and enables consumers to purchase homes with a minimum down payment of:
- 5% for homes costing less than $500,000
- 10% on the portion of any mortgage it insures $500,000 and over
For example, to buy a home for $750,000, the home buyer would need a minimum down payment of $50,000, which is the total of 5% of $500,000 ($25,000), plus 10% of the remaining $250,000 ($25,000).
Homes purchased for more than $1 million do not qualify for mortgage loan insurance, as a 20% down payment is required to buy these homes.
To obtain mortgage loan insurance, lenders pay an insurance premium, the cost of which is normally passed on to the home buyer. The premium payable is based on a percentage of the home’s purchase price that is financed by a mortgage. The premium can be paid in a single lump-sum or it can be added to the mortgage and included in the monthly payments.
Mortgage Rate Stress Test
In January 2018, the Government of Canada’ s Office of the Superintendent of Financial Institutions (OSFI) amended the mortgage rules introduced in 2016 that require Canadian home buyers to take a mortgage stress test to qualify for a mortgage at a bank. Previously, this test was only required to approve buyers who had a down payment of less than 20% and required mortgage loan insurance. Now all buyers, including those with a down payment greater than 20% who do not require the default loan insurance must take a mortgage stress test.
The stress test is applied at the time of the mortgage loan insurance application. It is conducted to ensure that the home buyer could still afford the mortgage if interest rates were to rise.
For more information on the mortgage stress test, view What mortgage loan amount can you qualify for? Stress Test.
Land transfer tax refunds
First-time home buyers may also be eligible for a land transfer tax refund of up-to $4,000, depending on when the home was purchased, and if it is a resale or newly constructed home. To determine if you qualify for a rebate, you should consult a lawyer. More information can also be found from the Ontario Ministry of Finance. More information on federal programs available to first-time home buyers is available from Canada Revenue Agency.
If you are buying a home and want to know how much of a mortgage you qualify for, use the Scotiabank mortgage calculator .
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