April 24, 2019

First-time home buyer benefits

Young parents cuddle their young baby Young parents cuddle their young baby

With the housing market exploding in recent years in certain parts of the country, it has become more and more challenging for first-time buyers to get a home.

Coming up with a down payment can seem impossible at times with soaring house prices and all the other costs surrounding a home purchase. In fact, the average price of a detached home in Toronto nearly doubled from 2011 to 2018Opens a new website in a new window.

Existing homeowners looking to make a move have an advantage, as the equity or value they have in their current property can be used to finance their next one.

It’s not all doom and gloom for first-time buyers, though, as there are some benefits they can take advantage of.

Land transfer tax rebate

If you buy a home in Canada, you are going to have to pay a land transfer tax based on the price of the home. The more expensive the property, the more tax you will have to pay.

For instance, you’ll have to pay a 2% tax on homes sold for over $400,000. With the prices of houses in some Canadian markets these days, that can be significant. That means if you purchase a home for $869,000, which is the average price of a homeOpens a new website in a new window in Toronto currently, you’ll have to pay a whopping $17,380 in land transfer tax.

Not only that, but homes purchased in Toronto are also subject to an additional municipal land transfer tax that can make things much pricier for first-time buyers.

There is a benefit they can take advantage of, though. First-time home buyers can receive a maximum of $4,000 of their land transfer tax back in certain parts of CanadaOpens a new website in a new window depending on the sale price. In Toronto, where there is an additional land transfer tax, buyers can also receive up to an additional $4,475 depending on the price of the home.

Although this won’t cover the entire tax, it certainly takes some of the sting out of an initial home purchase for first-time buyers.

Ability to use RRSPs tax free for home buying

One reason to invest in RRSPs when you are young is that they could be a helpful source of money when it’s time to buy a house.

The government proposed an increase for the 2019 Federal Budget so first-time buyers can now use up to $35,000 of their RRSP tax free to purchase a home. This extra money could be a significant advantage when going against others in a bidding war. If you are buying a home with someone else that is a first-time buyer, they can also use up to $35,000 of their RRSP on the house. That potentially gives you and your partner access to $70,000 to use depending on how much you’ve invested in RRSPs.

It’s important to note, though, that you must replenish your RRSPs within the next 15 years to avoid paying taxes on the money you withdrew.

First-time home buyers tax credit

If you are a first-time buyer, you may qualify for a tax creditOpens a new website in a new window when you purchase a home.

Houses bought after Jan. 27, 2009 became eligible for the non-refundable credit, that can be claimed on your income taxes in the taxation year when you bought your home. You can reduce your tax payable up to $750, which can also be claimed or combined with a spouse or partner. If shared, though, the credit still maxes out at $750.

You could use that money to buy something for your new home or put it towards some renovations. It may not seem like much, but keeping an extra $750 in your pocket is certainly a bonus.

Mortgage stress test

In 2018, a new stress test was implemented in Canada that requires anyone purchasing a home to qualify for a mortgage under new conditions, even if they make a 20% down payment.

That means you’ll have to qualify for a mortgage based on the Bank of Canada’s five-year benchmark rate or at 2% more than what your lender is offering, whichever is higher. So, if your lender is offering you a mortgage rate of 3.74%, you’ll actually have to qualify at 5.74%.

If you’re avidly hunting for a home you may be aware of the stress test, but there are some additional details you may also want to know. Mainly, if you recently purchased a home as a first-time buyer before the stress test came into the play, you’ll still have to pass it if you switch to a new mortgage provider or plan to re-finance your home.

It’s important for first-time buyers to keep this in mind as it could impact how long of a mortgage term you want to take on initially, such as a 5- or 10-year term. A longer term will give you more equity in your home when it’s time to renew, putting you in a better position to pass the stress test if you want to explore changing lenders.

This information is general in nature and is intended to create awareness only. It is not to provide legal or tax advice. For specific situations you should consult the appropriate legal, accounting or tax advisor.

Talk to an expert

Not feeling confident in your finances? You can talk to one of our financial security advisors who will work with you to craft a financial plan tailored to your needs.

Contact an advisor