Helpful tips for First time home buyers and their parents in a rising rate environment

Your down payment is the most critical component for first time homebuyers.

Down payment is the most important consideration before you look to purchase your first home. Once ready for home ownership, meet with a mortgage broker to discuss your down payment options and buying power before shopping for a home. You want to save more than five percent of the purchase price. For any home over $500,000 but less than $1 million, you need 5% on the first $500,000 which will be $25,000 and 10% for any amount over this threshold.  If you have less than a 20% down payment, then you are required and restricted to a 25-year amortization mortgage. If you have 20% down or more, you can choose a 30-year amortization mortgage, which allows you to reduce your mortgage payments. If the funds are coming from your savings, you will need to provide a 90-day history of bank statements. With the “great intergenerational wealth transfer” on in Canada homebuyers are receiving down payment help gifted to them by a parent or grandparents. You’ll need to provide a letter signed by your parent or relative outlining that you aren’t required to pay the money back.  (see advice under “Keep your cool…”)

Keep your cool by knowing your buy-in price for a home AND

• Parents, don’t put yourself in a financially precarious position to help your kids buy a house
• Parents review the use of a HELOC or Reverse Mortgage (see below) to free up cash from the equity in your home to gift/loan to your children
• For millennials and Gen Z, be mindful that your parents may need all their savings to remain financially independent in retirement
• Be careful of what happens to down payment gifts and loans if a young couple separates or divorces: consulting a lawyer in advance makes sense.
• Let renters help pay your mortgage

Home Equity Line of Credit (HELOC)
You may be able to borrow through a home equity line of credit (HELOC), which has attractive rates and allows you to borrow up to 65 per cent of the home’s value. One of the big advantages is that you can take money out only when you need it, and you only have to make interest only payments. Set this up before you retire so you don’t have to worry about not qualifying later.

Reverse Mortgage
A reverse mortgage is type of mortgage where you don’t have to pay off, or even make payments on, until you sell your home or die. It is ideal for house-rich but cash-poor retirees with limited incomes who need a source of funds but don’t want to leave their homes.

Obtain a Pre-Approval through your mortgage broker – a Pre-Approval is an official document from a lender that tells you exactly how much loan money you can get based on your financial information.  This will assist you in narrowing your search for a property.

The Home Buyer’s Plan for first time homebuyers is a federal government program that lets you withdraw up to $35,000 tax-free, $70,000 for a couple, from an RRSP to buy a home. After you withdraw the funds, you must pay them back to the RRSP over 15 years. Talk to your mortgage broker about the details of this program.

The First-Time Home Buyer Incentive is a federal government shared equity program designed to reduce mortgage payments for qualifying first-time buyers who have the minimum 5% down payment required for an insured mortgage. The program will provide 5% of the cost of an existing home, or 10% of a new home. This incentive isn’t payable until you sell the property and is not charged interest. There are a few caveats:  If your household income is more than $120,000, you aren’t eligible for the program.  Your total borrowed amount can’t be more than four times your household income.  The maximum down payment for the 10% incentive is 9.99% and 14.99% for 5% down.  You are required to pay the incentive back after 25 years or when you sell the home, with the repayment amount based on the property’s fair market value, whether it has increased or decreased in value.  Talk to your mortgage broker about the details of this program.

HST New Housing Rebate

If you are purchasing a new construction home or performing significant renovations to an existing one, whether a first-time buyer or not, you can recover some of the HST that you paid if all eligibility conditions are met. Ontario will refund 75% of their portion of the HST on the first $400,000 of your home’s value, which totals $24,000. An additional maximum of $6,000 is available from the federal portion.

You need to apply within two years of your closing date and the home must be used as your or an immediate family member’s primary place of residence. Only immediate family members can be on title, or this rebate will be denied. If this may apply to you, check out the CRA’s Guide titled GST/HST New Housing Rebate (RC4028).

Land transfer tax rebate

First-time home buyers may be eligible to get a rebate of up to $4,000 for any land-transfer tax paid on the first $368,000 of qualifying homes. To claim the refund, you must be a legal adult who has never owned a home or an interest in a home (even one you inherited or were gifted by a family member). First-time buyers in the city of Toronto are eligible for an additional rebate of $4,475.

Stress test affecting your ability to get the mortgage you want? Here are 6 options for you to consider:

1. Have your mortgage broker obtain a variable rate to qualify and then lock into a fixed rate once your mortgage closes. Variable rate mortgages allow you to lock in at anytime without a stress test.
2. If you have 20% equity and qualify for a conventional mortgage, to avoid the stress use a Credit Union that can qualify you without using the government’s stress test since they are not federally regulated. You can also have a 30-year amortization with a conventional mortgage which further improves affordability.
3. Private lenders are another option to avoid the stress test but you will pay a higher interest rate.
4. A gifted down payment from an immediate family member may be a solution to improve your ability to qualify for a mortgage. 
5. Having one or both of your parents co-sign your mortgage is another strategy that can improve your ability to qualify for a mortgage.
6. Rent out a portion of the home

Your mortgage broker is your conduit to professionals
It’s important to have a strong away team so that all aspects of your home buying experience are efficient and professional. Your team will include a realtor, lawyer, and a home inspector.  A mortgage broker can refer you.

Closing costs
There are additional costs that come with the initial purchase of a home. Generally, you can expect to pay between 1.5% and 4% of the home’s selling price in total closing costs. Many homebuyers often understand too late that they weren’t prepared for these costs and that’s why a mortgage broker will make sure you fully understand all the costs associated with buying your first home.

Home ownership ongoing fixed costs
Remember that home ownership involves costs beyond the monthly mortgage payment such at heat, hydro, water, internet, insurance, property taxes and maintenance. Budget for these.

Key Takeaways:

• Consider placing a 20% down payment on a dwelling and qualifying to take a 30-year amortization period mortgage.  Your purchasing power improves because you are more financially capable of purchasing your home.  Your mortgage payment is reduced however you may pay a slightly higher rate (usually 25 basis points higher).  An early inheritance from parents or grandparents could help to make this a reality.
• Rent out a portion of the home you are purchasing to improve affordability and qualification.
• Consider accepting a gifted down payment from a family member.
• Have parents co-sign your mortgage to improve qualification for the mortgage.
• Consider purchasing a home with friends or another couple all of whom sign an agreement at a lawyer’s office considering, for example, to document how you eventually exit the property and documenting your proportionate interest.
• Use an Invis or Mortgage Intelligence mortgage professional to guide you in the home buying process and determine your purchasing power and payments.
• Use government programs for first time home buyers to your advantage – they are designed to help.
• Make your purchase in a smaller city or town where housing costs are cheaper
• Negotiate – it’s a buyer’s market with home prices falling as interest rates are rising.
• Don’t pass on the home inspection and continue negotiating on a price reduction based on the home inspection report.