Options for first time home buyers

Interest rates are going up, mortgage rules have changed and house prices in some parts of the country don’t seem to be going down – yet. This may not look good for first time homebuyers who may find they can’t afford to buy that dream house – yet. But it’s not all gloomy. There are still areas of the country where prices have remained steady; and if all goes the way the government indicates, prices may start coming down in 2018.

First timers should still be looking at their options.

Usually the biggest obstacle for first time home buyers is coming up with the down payment. In 2017 the average down payment for first time home buyers was 26%. Sources included:

•         Loans, gifts from parents and/or other family members (accounted for 18% of down payments)
•        RRSP withdrawals (accounted for 7% of down payments)
•        Own savings (accounted for 54% of down payments)
•        Loan from a financial institution (accounted for 19% of down payments)

With the new rules introduced over the past year and the fact that we’re now in RRSP season, it’s a good time to look at the Government of Canada’s Home Buyers' Plan for first-time home buyers, which allows them to withdraw up to $25,000 from their RRSP, without a penalty.  If you are married or purchasing the property with another first-time home buyer, each of you may withdraw the maximum each for a total of $50,000.

Once you decide to use your RRSPs then there are a few rules.

What’s the definition of a first-time home buyer?

You are considered a first-time home buyer if, in a four-year period, you have not occupied a home that you or your common-law partner or spouse owned. Even if you or your spouse or common-law partner have previously owned a home, you may still be considered a first-time home buyer.

The four-year period begins on January 1^st of the fourth year before the year you withdraw the funds and ends 31 days before the date you withdraw the funds. For example, if you withdraw funds on March 31, 2018, the four-year period began on January 1, 2014 and ends on February 28, 2018.

If you don’t fit that four-year window yet, you could wait and buy later. For example, if you sold your home in 2013, and did not purchase another one until 2018, you can participate as a first-time home buyer.

Also, buyers must have a bona fide purchase agreement for a house that will be owner-occupied.

What’s a qualifying home?

No rentals or investment properties. You must have either bought or built the home before October 1^st of the year, after the year of withdrawal. And you can buy or build the home alone or with others. When purchasing with others, the benefit applies to the entire purchase even if only one person qualifies as a first-time home buyer.

Paying it back

RRSP withdrawals must be paid back within 15 years so each year 1/15 must go back into the fund. If not, then that amount will be taxable. For example, if you withdraw $25,000 from your RRSP then you must pay back $1,667 every year for 15.

However, it’s not straightforward – you must designate the amount as a payback for the Home Buyer’s loan.

RRSP withdrawal conditions

• You have to be a resident of Canada at the time of withdrawal
• You have to receive all withdrawals in the same calendar year
• You can only withdraw up to $25,000
• No tax will be withheld
• You cannot withdraw from an RRSP that is locked in
• Your RRSP contributions must be in the account for 90 days before withdrawal
• You must fill out a form to withdraw funds, which can be found at the Government of Canada website

TIPS

You may want to consider borrowing to deposit into an RRSP this tax season which, after 90 days, can be used as a down payment. There might also be a tax benefit for you.

You can use your RRSPs as a down payment more than once as long as the balance from the first withdrawal has been paid back in full.

To keep track of your account, each year you will get a statement with your Notice of Assessment showing what you owe and how much contribution you have in your RRSP.

TFSA

This might be a better way to save for your down payment. It is, however, a longer-term strategy. There isn’t a lot of room to save, the maximum is $5,500 each year, but your money grows tax free. When you hit your target, you can withdraw the money with no strings attached.

For more information about the Home Buyer’s Plan and to develop a plan for your down payment, contact your mortgage professional. He or she has the tools and the expertise to help you realize your dream of home ownership.

By Bud Jorgenson, VP.TMG  Prairies

Mentor of the Year, 2017, Mortgage Professionals Canada

What’s best for consumers?

We need to clear the air. We’ve recently come across marketing materials that some Bank mortgage specialists have been sending aimed at “educating” members of the public on the impact of the mortgage rule changes and the limitations of dealing with mortgage brokers. Some bank specialists are referring to mortgage brokers as sub-prime brokers and that the recent changes to the mortgage rules will negatively impact us. As mortgage brokers we would like to respond.

We agree that it is vital for Canadians to be educated on the ways in which the most recent mortgage rule changes coming into effect, and all recent regulatory and legislative changes will impact mortgage consumers and markets as a whole.  We applaud all efforts to bring awareness at this very important juncture in our industry.

The Office of the Superintendent of Financial Institutions (OSFI) is an independent government agency whose mandate is to supervise federally regulated financial institutions.  OSFI is the agency who is updating their B-20 underwriting guidelines that came into effect on January 1, 2018.

In addition to having access (directly or indirectly) to most of the major Tier 1 banks in Canada, mortgage brokers also have access to many other provincially-regulated and private mortgage lenders. Those lenders include Credit Unions, Monoline mortgage lenders who have funded hundreds of billions of dollars in aggregate (including First National, MCAP, Merix, Street Capital, etc) alternative lenders (Canadian Western Bank, Equitable Bank, Home Trust, etc.) and private lenders. 

This allows brokers to ensure that the features of the mortgage are aligned to the client’s needs. Brokers will look at prepayments options, how penalties are calculated, how the mortgage is registered and how the client credit fits against the available products.

Perhaps it is only semantics but when a customer deals with a broker they do not have to ‘negotiate’ a rate with the lender directly – the broker shops the market to secure the best overall cost of borrowing for the unique needs of the consumer.  This competition maximizes the opportunity for a consumer to get the best overall deal.

The recent OSFI changes are actually targeting all consumers (including the federally regulated banks) rather than only the subprime market. In fact, it may create market share opportunities for subprime lenders. 

We certainly agree on the need for consumers to get the best advice. A mortgage broker is licensed with their corresponding provincial regulator. They have to meet initial education and licensing requirements and then have to maintain educational requirements going forward. Given the breadth of lender and mortgage products available to brokers, they have to constantly do research on the options available to their clients.

Brokers also get to deal with large regulated banks. Sometimes that represents the best option for the client to consider. Other times specialty lenders, mono-line lenders and unregulated lenders represent the best interests of consumers. 

Broker market share has actually increased steadily since the onset of the Global Financial Crisis and with each additional mortgage rule and regulation changes. This is because brokers are best suited to assess a mortgage client’s needs and then access a number of market options to fit those needs.

Debunking the myths

Myth: With the broker channel, the goal is to move the mortgage on each renewal

Reality: The goal of the broker channel, in general, is to present multiple options to consumers so they get the optimal mortgage for their unique needs. That includes looking at prepayment options, type of mortgage charges, costs of borrowing, portability, etc.  Brokers often advise their clients to stay with their current lender at renewal. The  goal at renewal is exactly the same. The result of providing clients with the best ongoing advice at the time of origination and at renewal, a broker is able to grow their referral networks.

Myth: If the client remains with the same lender at renewal a small trailer fee is paid to the broker. 

Reality: This is true in some cases and creates accountability between the lender, broker and customer in those cases.

Myth: If they (brokers) move the mortgage to a new lender then the full mortgage commission is paid as it represents a new deal to that new lender. This becomes a “residual or passive income” source for the broker.

Reality: If a client chooses to move their mortgage at renewal after being given the options then it is considered a new deal. As such it has all the corresponding work associated with any new file at that time.  That is not residual income – it is earned income and in most cases paid by the financial institution receiving the mortgage, NOT the client.

Clients save money when they work with a mortgage broker at renewal

The Bank of Canada released a report a few years ago titled “Competition in the Mortgage Market” and found the following:

“Banks also offer larger discounts to new clients than to existing clients. Consumers willing to switch financial institutions when shopping for their mortgage will see, on average, an additional discount of 7 basis points from the posted rate. The results also indicate that borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly. This average discount is about an additional 19 basis points.”

Most mortgage brokers offer ongoing advice and information to their clients. Because they deal with a wide variety of lenders for unique circumstances they are often very well versed in issues affecting mortgage borrowers.

For example, as of January 1^st, a bank rep may tell you all uninsured mortgages have to be qualified at the benchmark rate or 200 basis points (whichever is higher). What they mean to say is all their mortgages are qualified in that manner.

It may be that a bank may be the best option for many clients but other lenders, credit unions for example, can still qualify the borrower at the contract rate.

By working with a licensed mortgage professional, you have a trusted advisor and problem solver, who is best positioned to navigate these changes.

Brokers take the time to first understand a client’s needs, both short term and long term, then recommend the right mortgage and present options. As the lending environment changes, brokers keep up-to-date with all these changes and have access to a variety of lenders including banks, credit unions, trust companies, monoline lenders and private lenders. No one is more knowledgeable and more informed than we are.