5 Mortgage Down Payment Options

The down payment is arguably the most important piece of the home-buying process. No down payment means no house. So how much of a down payment do you actually need and what are your options?

First Things First

How Much Do I Need?
Recent rule changes created some confusion around this question. Simply put, the minimum required down payment on a typical home purchase is just 5%. However, if you’d like to avoid adding default insurance to your mortgage you’ll need to put down at least 20%. Due to budget constraints, most new home buyers opt for 5-10% down. There are some situations where you may need more than the 5% minimum. These include:

  • Owner-Occupied Triplex/4-plex (10%)
  • Rental (Not owner-occupied) (20%)

Now that you know how much you need…

What Are My Down Payment Options?

1. Ol’ Fashioned Savings
Perhaps the most desirable and straight-forward source of down payment is your own hard-earned savings. Banks and mortgage lenders will want to see a 90 day history of your account statements as verification.

2. Using RRSPs and the Home Buyer’s Plan
The Federal government allows First Time Buyers to withdraw up to $25,000 from their RRSP without having to pay withholding tax as they normally would on an RRSP redemption. The catch… you must re-contribute these funds to your RRSP over 15 years–starting the second year after your withdrawal. For more on the HBP and other first-time buyer benefits, read hereSavvy Tip: Some strategic first time buyers will invest their “Ol’ Fashioned Savings” into their RRSP account in the year(s) leading up to their purchase. This generates bigger tax refunds which they add to their RRSP, helping accelerate their down payment. They then redeem their original contributions plus refund money using the Home Buyer’s Plan. I recommend speaking with a financial advisor when trying strategies like these.

3. Gifted Down Payment
A cash gift from an immediate family member can be used for your down payment. Generally, the lender will ask for a gift letter confirming the giftor’s relation to you and that the gift is non-repayable. You will also need to provide a bank statement showing that the funds have been deposited to your account.

4. Borrowed Down Payment
Though the default insurers (see above) allow it, many lenders frown upon it. That said, if the rest of your mortgage application looks good (credit history, income, etc) and you just haven’t been able to save a down payment yet, a borrowed down payment may work for you. If you go this route, the lender will need to consider the monthly payments of that loan or line of credit on your mortgage application.

5. Home Equity Line of Credit (HELOC)
If you already own a home with lots of equity, you can choose to secure a line of credit against it and borrow the funds to purchase another property–perhaps a cottage or rental. Using a HELOC is also a “borrowed” down payment; however, since it is secured against your home it is viewed more favourably by lenders.

6. Mix and Match
A down payment does not have to come from one source. Make your mortgage agent’s day and mix it up!

handing over keysA Quick Note On Closing Costs

It’s very important to remember there are other costs to buying a home. An appraisal, home inspection, land transfer tax, and legal fees are all things to consider. To ensure you have enough money to cover these costs, most mortgage lenders will require you to provide evidence of an extra 1.5%. For example, if you plan to put 5% down, make sure you actually have 6.5% available.

Now that you know how much you have to put down and the different ways you can achieve your down payment, enjoy the excitement that is the home-buying experience!

This post was written by Patrick Briscoe. Patrick is a Mortgage Agent and Financial Advisor serving clients in London and the surrounding area. Feel free to contact him here. The recommendations and opinions expressed are those of Patrick Briscoe and do not necessarily reflect those of Equity Associates Inc. or Real Mortgage Associates Inc., and are not specifically endorsed by Better Financial or Equity Associates Inc or Real Mortgage Associates Inc. This article is not intended to provide individual financial, legal, tax or investment advice bur rather is to be used for information purposes only. Particular investment or trading strategies should be evaluated relative to each individual’s objectives.

Make Your Mortgage Tax Deductible

Equity Associates Inc. is not affiliated with this strategy. Please speak with your financial advisor for more details.

Convert mortgage interest into tax-deductible interest while increasing your retirement savings at the same time. The Smith Manoeuver achieves this goal. Find out more below:

Although Canada does not allow home-owners to write off their mortgage interest, the government does offer an investment incentive that allows Canadians to turn their mortgage  into tax-deductible debt. Tax deductible means that, at income tax time, you are refunded a portion of the interest paid on your loan. Made popular by Fraser Smith’s book entitled The Smith Manoeuver, this strategy helps ordinary Canadians access tax benefits that, previously, only the rich could afford to take advantage of.

The Smith Manoeuvre is a debt conversion strategy. It steadily converts your mortgage debt into a tax-friendly investment loan, which allows you to increase your assets while making any interest you pay tax-deductible. The result is increased net worth and reduced income tax.

Ninety percent of Canadians feel that they are unable to “get ahead” of their finances. The constant struggle of keeping up with mortgage payments means that the majority of Canadians are unable to build adequate retirement savings. They will rely heavily on government-funded programs that may not be sufficient.

A focus on paying down debt while delaying personal savings means that, by retirement, many Canadians are house-rich and cash-poor. They may have a home without a mortgage but are still struggling to find cash-flow each month. Thus, many are forced to either sell or refinance their homes. By implementing the Smith Manoeuvre strategy now, you allow time and compounding to be on your side so you can avoid such a situation and be financially secure in the future. The common misconception that you should pay your mortgage off first and then invest leaves you years behind those who chose to invest early.

The rich may be getting richer, but rather than complain, we can learn from their methods. -Fraser Smith

In the United States, mortgages are tax-deductible. This means that Americans pay significantly less interest each year on their mortgages. Savvy Americans funnel these savings into their retirement investments, helping them build a solid nest egg. One in fourteen Americans have reached millionaire status and, of those, 90% have taken advantage of this tax incentive in order to accumulate their wealth. Although Canadians’ mortgages are not directly tax-deductible, the Smith Manoeuvre allows us to have the same benefits.

It is projected that the number of Canadian millionaires is expected to rise 32% by the year 2020. With sound financial advice and strategies, it is possible for you to be a part of this club. Better Financial is proud to say that it helps its clients work towards and exceed this goal.

Note: The Smith Manoeuvre strategy must meet guidelines set by the Canada Revenue Agency. It is important that you work with a professional who is familiar with these guidelines and works within them to ensure that you are in-line with Canadian tax laws.

Contact us today for more information about implementing the Smith Manouvre.

  • Pay off your home sooner
  • Convert your mortgage interest into tax-deductible interest
  • Receive yearly tax refunds
  • Start compounding your savings earlier
  • Build your wealth

 

What is a Registered Disability Savings Plan (RDSP)?

By opening an RDSP account, you may be able to receive up to $18,000 in free government grants. Read on to find out more:

The Registered Disability Savings Plan (RDSP), is a tax-deferred savings account created by the Canadian Government. It’s purpose is to help build long-term financial security for disabled persons. Where the RDSP truly accelerates savings is in its ability to receive Government grants that match up to 300% of the owner’s contributions. By opening an RDSP, you may be able to receive up to $4,500 per year in government funds. Let’s learn more about the RDSP:

Who Qualifies for the RDSP?

You qualify to be an RDSP beneficiary if you are eligible for the Disability Tax Credit, a resident of Canada, less than age 60, and have a valid Social Insurance Number.

How Contributions are Made

Contibutions to the RDSP can be made by the account holder or by any person the account holder has authorized. The account may also be opened on behalf of a disabled beneficiary. The lifetime contribution is $200,000 and contributions can be made up until the age of 59. Soeak with your advisor to work out a contribution plan that benefits you most.

Receiving Government Help

Canada Disability Savings Grant

CDSGs are matching grants that the Government will deposit into the RDSP to help accumulate savings. The Government provides matching grants of up to 300%, depending on the amount contributed and family net income. Unused CDSGs can also be claimed for previous years. If you are just now opening an RDSP, you may be eligible to receive these amounts dating back to 2008. The chart below outlines 2013 CDSG matching rates:

Family Net Income CDSG Matching Rates Maximum Annual CDSG
Up to $87,123 300% on first $500
200% on next $1,000
$3,500
Over $87,123 100% on first $1,000 $1,000

Example: Roger, whose family income is less than $87,132, has just set up his RDSP. To take full advantage of Government grants, he contributes $1,500 this year. For the first $500 Roger puts in, the Government contributes $1,500. For the remaining $1,000, they give Roger $2,000. At the end of the year, Roger has contributed $1,500 while the government has deposited $3,500. This is a total of $5,000! Not bad for a $1,500 investment.

Canada Disability Savings Bonds

In addition to CDSGs, lower income families have access to CDSBs. The Government may deposit up to $1,000 a year to the RDSP of a low-income beneficiary, even if no contributions are made into the RDSP. The chart below outlines 2013 CDSG matching rates:

Family Net Income Maximum Annual CDSB
Up to $25,356 $1,000
Between $25,356 and $43,561 $1,000 reduced on a prorated basis
Over $43,561 No bond is paid

As you can see, the grants and bonds given by the Government are quite substantial and can boost your investment savings significantly. This is what makes the RDSP one of the most beneficial registered plans available.

Withdrawing from an RDSP

At age 60, the RDSP beneficiary must start withdrawing funds. Withdrawals normally come via recurring annual payments, called Lifetime Disability Assistance Payments. Lump sums may also be withdrawn during or prior to retirement; however, any grants or bonds received within the past 10 years must be repaid in this situation. This 10-year rule is in place to ensure the RDSP is used for long-term savings.

Taxation

Because original contributions are non-deductible when contributed, they are not taxed on withdrawal. Investment income, CDSGs and CDSBs are taxed when received.

Opening an RDSP Account

To ensure your account is set up properly and effectively, it is recommended that you see a financial advisor when opening an RDSP account.

If you have further questions about this or other topics in our Learning Centre, please feel free to Contact Us.

How to Unlock Your Pension

Pensions can be an excellent way to supplement your retirement income. Sometimes, however, there may be a need to access these funds before you retire. If you have a “locked-in” pension or RRSP from a previous employer, there are ways to access this money.

Why Unlock My Pension?

There are many reasons why someone would want to unlock their pension. Perhaps you need to access the money because you are in financial hardship due to job loss, reduced income, or debt. Alternatively, maybe you want to withdraw money from your locked-in account and transfer it to a RRSP where you can access it later without restrictions. Whatever the reason, accessing your pension may be a positive move for your financial future. A financial advisor can help you determine whether unlocking your pension is the right move for you.

How Do I Unlock My Pension?

The Provincial and Federal Governments of Canada allow individuals with a locked-in pension (also referred to as Locked-in Retirement Accounts [LIRA] or Locked-in RRSP) to access their funds if they meet certain criteria. Put simply, if you are in financial need, it is likely that you would qualify to access some of your locked-in funds.

1Financial Hardship
A common reason for accessing a pension before retirement is due to financial hardship. There are four situations where you may be able to claim financial hardship and access your locked-in pension: 1) low expected income in next 12 months 2) payment of first and last months’ rent 3) arrears of rent or mortgage 4) medical expenses.
2Unlock 50% By Transferring
If you are at least 55 years old or at an age where you would have been eligible for a pension from the originating pension plan (whichever is less) you can transfer your locked-in pension to a Life Income Fund (LIF). Once transferred, you are able to make a one-time withdrawal from this LIF of 50%, which you can use as income or transfer to unlocked investment account such as a RRSP.

3Small Pension Amount after Age 55
If you are 55 or older and the total of your locked-in pension(s) is less than $21,000 you can apply to unlock your pension.

4Non-residents
If you are a non-resident of Canada and 24 months have passed since the date of your departure from Canada you may unlock your pension.

5Shortened Life Expectancy
If your life expectancy has been shortened to two years or less you can apply to unlock your pension.
The benefits and drawbacks to unlocking pensions are often debated in financial circles. To find out if this is the right move for you, be sure to talk to a financial advisor.

If you have further questions about this or other topics in our Learning Centre, please feel free to Contact Us.

98.1 Free FM Better Tips

Better Financial teamed up with London’s 98.1 Free FM to provide listeners with daily financial tips that will help them save money and achieve their financial goals sooner.

All of our Free FM tips are posted below. You can listen to the tips or get more information on each tip below. Keep checking back as more tips are released.

For further information, or if you have any questions, please feel free to contact us and one of our professionals will be happy to help!

Better Tips

firsttimebuyers_smallFirst Time Home Buyers
Find out how you can save money when buying your first home.

consolidateDebt Consolidation
Save thousands in interest and monthly payments by turning multiple high-interest debts into one low-interest payment.

unlockpensionUnlock Your Pension
Find out how you can access your “locked-in” pension from a previous employer.

home_consolidationHome Equity Lines of Credit
Find out how you can get a line of credit at a low interest rate.

piggybankTax Free Savings Accounts
Find out how to get the most out of a TFSA.

Incentives for First Time Home Buyers

The Government of Canada offers two major incentives for first time home buyers. The Home Buyers’ Plan (HBP) and the First-Time Home Buyers’ Tax Credit (HBTC) can help you save money when buying your first home. Let’s find out a little bit about each of these incentives and how they can help.

1. Home Buyers’ Plan

The HBP allows you to withdraw up to $25,000 from your RRSPs to buy or build a home for yourself or a related person with a disability. To qualify, you must be a resident of Canada purchasing your first home. You also qualify if it has been at least 4 years since you last owned a home. Here are a few more details of the HBP:

  • If you are buying a home with a spouse, they may also withdraw up to $25,000.
  • The money being withdrawn must have been in the RRSP account for at least 90 days.
  • You have up to 15 years, starting the second year after withdrawal, to repay the RRSP. Your yearly repayment will be 1/15th of the amount you withdrew. If you do not contribute to your RRSPs for one or more of these years, the amount is added to your income at tax time.
Why Use the HBP?

The HBP is one of the only ways you can take money out of your RRSPs tax-free. It is a great way for people with RRSPs to put a downpayment on a new home.

But what if you don’t have an RRSP? The HBP can still benefit you! Many people planning to buy their first home open up an RRSP account to start saving for their downpayment. By putting their savings into an RRSP account, they receive a credit/refund at tax time. This can either be added to their savings or used to help pay for other expenses.

For more information see the Canada Revenue Agency’s Home Buyers’ Plan webpage.

2. First-Time Home Buyers’ Tax Credit

This incentive, part of Canada’s Economic Action Plan, gives first time home buyers a $5000 tax credit for the year in which they buy their first home. This credit can be shared or split with a spouse but cannot exceed $5000 total. This tax credit is applied to your income tax return, which means you can receive up to $750 worth of tax relief from the government.

Like the HBP, to qualify for this incentive, the home you purchased must be used as your principal residence. Simply mention to your tax preparer that you bought a qualifying home during the year and they can help ensure you receive your credit.

The Home Buyers’ Plan and First Time Home Buyers’ Tax Credit are great incentives offered to first time buyers by the Canadian Government. If you are interested in finding our more, please feel free to Contact Us and we will be happy to help.

What is Debt Consolidation?

“Debt Consolidation” is a term we often hear on radio or TV advertisements. Unfortunately, many of these advertisements do not explain very well exactly what debt consolidation is. The purpose of this article is to clear up some of the confusion around debt consolidation and to give you an understanding of how it can help you save money while paying your debts off sooner.

Turning Many Debts into One Better Debt

The concept behind consolidation is to take multiple high-interest debts–such as credit cards, lines of credit, auto loans, etc–and merge them into one low-interest debt. What this allows you to do is reduce the overall monthly payments and interest you are paying. By consolidating, you are able to free up monthly income which can then be used to accelerate debt payments, pay for other necessities, increase your retirement savings, or simply create more breathing room at the end of each month.

Let’s take a look at what debt consolidation looks like in table form (click image to enlarge):

Example of debt consolidation

Example of debt consolidation

As you can see in the table, this client’s multiple debts on the left have been consolidated into one debt on the right. This alone reduces their monthly payments by $1243.79 per month. On top of this, the new low interest rate means that they will also be saving $33,000 in interest over the next five years. You can see how this simple strategy can dramatically improve your financial situation.

 

Using your mortgage to consolidate

Consolidate debt into your mortgage

Consolidate debt into your mortgage

Due to the historically low interest rates being offered these days, your mortgage is usually the best way to consolidate debt. By refinancing your mortgage, you can build your high-interest debts into your low-interest mortgage and realize the benefits outlined above. Even if your mortgage is not maturing in the near future, it may still make sense to refinance now to take advantage of the thousands of dollars in interest you can save.

Common Questions and Answers

What does it mean to “refinance”?

Simply put, refinancing is when you re-borrow money you have already paid towards your mortgage. People often do this as a cost-effective way to borrow money after having paid off a portion of their original mortgage.

Will debt consolidation hurt my credit?

Debt consolidation should not be confused with a consumer proposal or bankruptcy where your credit is damaged for a period of time afterwards. Debt consolidation is simply a money management strategy. In fact, by better managing your debt, consolidation often improves your credit score.

How much can I consolidate?

If you own a home, you can refinance up to 80% of its market value. For example, if the market value of your home is $200,000 you can borrow $160,000 ($200,000 x 0.80). Subtract the amount you currently owe on your mortgage and you will be left with the available “room” you have left to consolidate other debts. For example, if your current mortgage balance is $100,000 you can consolidate up to $60,000 worth of other debts into your mortgage.

Why haven’t I heard of this before?

As mentioned at the beginning of the article, there is a lot of confusion about what debt consolidation actually is. This is understandable since banks do not normally promote this idea; they would rather see their clients take out lines of credit–which charge higher interest rates. Fortunately, people are becoming more aware of their options and are seeing that debt consolidation is a great way to reduce debt faster and free up extra cash each month.

Debt consolidation is a great way to minimize your monthly payments, save thousands in interest, pay down your debt sooner, and reach your financial goals faster. If you are interested in finding our more, please feel free to Contact Us or fill out our no-obligation Application if you would like us to review your details and contact you directly.

Company Introduction

At Better Financial, we help you get the most out of your hard-earned money. Our range of services mean that we can set you up with a financial plan that is fit and efficient for your situation. Watch our introductory video to find out how this harmonization can help.