Incentives for First-Time Homebuyers

Four ways to reduce the financial burden of home ownership in Ontario.

By Emily Southey | 9 minute read

Are you looking at the cost of homes in Ontario and wondering how you’ll ever scrape together enough money to buy your first home? You’re not alone. While the idea of buying a home may seem out of reach for many Canadians, there are plans, programs, and incentives in place to help new homebuyers break into the real estate market.

These incentives allow buyers to make smaller down payments than the standard 20%. Other government programs allow first-time homebuyers refunds for provincial and municipal land transfer taxes. Additionally, Canada’s Homebuyers’ Plan (HPB) makes it possible to obtain funds by withdrawing from a registered retirement savings plan (RRSP).

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1. Mortgage Default Insurance

Most people don’t have enough capital to pay the entire cost of a home outright. For this reason, it’s common for people to fund part of the purchase and rely on a mortgage for the rest. The initial upfront partial payment of a home is called a down payment. It’s easy to estimate a down payment’s cost using a first-time buyer calculator. All you need to do is input the cost of a home and its required down payment percentage. The calculator will then show your down payment amount.

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Making the Minimum Down Payment

It’s normal to pay around 20% as a down payment for a new home. This was once considered a standard down payment. However, many lenders now allow buyers to make smaller down payments with the added requirement of the buyer purchasing mortgage loan insurance. The minimum payment Canadians can make on a home’s price is 5% on a home costing $500,000 or less. For homes over $500,000 but under $1 million, this minimum down payment is 5% on the first $500,000 and 10% on the remaining balance. Any of these down payments less than 20% of the purchase price are called high-ratio mortgages. These mortgages are only available for homes with a price of $1 million or less. Otherwise, buyers will have to pay the standard down payment of 20% or more.

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High-ratio mortgages make it easier to afford a down payment but come at an added cost. To protect themselves against borrowers skipping out on mortgage payments or defaulting on their mortgage, high-ratio lenders require buyers to pay for mortgage loan insurance, also known as mortgage default insurance.

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High-Ratio Down Payments

The term high-ratio mortgage refers to the larger spread between the down payment made and the amount lent. Mortgage default insurance is calculated as a percentage of the loan and can be paid monthly or as a lump sum. These rates range from 1.8% to 4% of the mortgage amount. Loaning a higher percentage of a house’s value will result in a correspondingly higher payment on insurance premiums. Since mortgage default insurance can be blended into monthly mortgage payments, it allows many buyers the opportunity to own a home sooner than if they needed to wait and save a minimum of 20% for an upfront down payment.

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The maximum amount of time given to pay your high-ratio mortgage, otherwise known as an amortization period, is 25 years. If you desire a longer amortization period, you will have to make a conventional down payment of 20% or more. Mortgage default insurance is offered by three institutions: the Canada Mortgage and Housing Corporation (CMHC), and two private insurers: Canada Guaranty and Genworth.

2. Canada’s First-Time Buyer Incentive

If you are pre-approved for a mortgage by a lender and are a first-time homebuyer, you may be eligible for financial incentives provided by the Canadian government.

 The Government of Canada’s First-Time Buyer Incentive offers 5% of an existing home’s resale price or 10% of a newly constructed home’s purchase price. This loan goes toward the down payment and is considered a shared investment in the property by the Canadian government. This shared-equity investment must be repaid based on the property’s fair market value at the time of repayment. The repayment must occur within 25 years of purchase or when the property is sold. There are five eligibility criteria for this incentive.

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1.   Your total qualifying income must not exceed $120,000. This limit increases to $150,000 if you are purchasing a home in Victoria, Vancouver, or Toronto.

2.   The amount you borrow must not exceed four times your qualifying income, or 4.5 times your qualifying income if purchasing in Victoria, Vancouver, or Toronto.

3.   You or your partner must be a first-time homebuyer.

4.   You must be a Canadian citizen, a permanent resident, or a non-permanent resident authorized to work in Canada.

5.   You must be able to pay the minimum down payment with traditional funds such as savings, withdrawal/collapse of an RRSP, or a non-repayable financial gift from a relative/immediate family member.

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These incentives are provided by the Canada Mortgage and Housing Corporation, a government organization that helps Canadians gain access to affordable housing.

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3. Land Transfer Tax Refunds

Both provincial and municipal governments in Ontario provide refunds and incentives to reduce land transfer taxation. These programs are directed to first-time homebuyers. One recent change to this incentive is that individuals with an annual income of up to $150,000 are now eligible. This is a $30,000 increase from the previous eligibility maximum annual income of $120,000.

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Land transfer taxes (LTT) are municipal or provincial fees levied on a property transaction. In Ontario, land transfer tax is based on a multi-tiered rate system, with 0.5% charged on the first $55,000, 1% on amounts above $55,000 up to $250,000, and so forth. In addition to provincial LTT, some Canadian cities like Toronto, Victoria, and Vancouver levy a municipal tax on property transfers. In Toronto, the municipal LTT uses the same percentage tiers as the provincial system, so a Toronto property will have double the LTT compared to a home of equal price elsewhere in Ontario. First-time homebuyers are eligible to receive refunds for both provincial and municipal LTT.

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Instead of making first-time homebuyers pay this fee in full, Ontario offers

 provincial land transfer tax refunds of up to $4,000. This refund’s limit of $4,000 is reached when a home’s purchase price is $368,000 or more. This means the refund of $4,000 is subtracted from municipal land tax on homes priced above $368,000. The eligibility requirements for provincial land transfer tax refunds dictate that buyers must not have owned or have held any interests in a home while they were a spouse. You must also be at least 18 years old to be eligible.

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If you’re buying a home in the City of Toronto, you will also be eligible for a refund for the municipal LTT. This refund is like the provincial refund but slightly more generous, offering a rebate of up to $4,475 for first-time homebuyers. People are eligible for these refunds when purchasing newly constructed or resale residential properties. Other conditions for eligibility dictate the buyer must be a Canadian citizen or a permanent resident. Buyers can claim their rebate after registering, or within 18 months of registration.

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Examples:

Let’s say you’re purchasing a property outside Toronto, like Thunder Bay or Ottawa. If the cost of a home there is $800,000 the blended rate for land transfer tax will be 1.56%. This percentage amounts to $12,475 of provincial LTT. Subtracting Ontario’s Provincial Land Transfer Tax Refund, you will end up paying only $8,475.

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To compare, if you were buying a house at this price in Toronto you would need to consider municipal LTT as well. In total, your provincial and municipal land taxes amount to $24,950. Combining both refunds ($4,000 for provincial and $4,475 for municipal) will leave you owing $16,475.

4. The Homebuyers’ Plan

Canada’s Homebuyers’ Plan (HBP) allows Canadians to take funds from a registered retirement savings plan to build or buy a home. The current financial limit people may withdraw from an RRSP is $35,000. These funds must be repaid to the RRSP within 15 years from the date they were withdrawn. Repayment toward your RRSP must begin the second year from when you withdrew funds, although you may choose to make these payments earlier. You may also repay more than you are required for any given year. Both starting payments early and repaying more than you are required will reduce your remaining HBP payments in later years.

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What is a Registered Retirement Savings Plan (RRSP)?

An RRSP is an account for saving funds for retirement. These funds defer taxes until they are withdrawn, making it easier for savings to grow. You can also gain interest from RRSPs.

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There are several types of RRSPs. One of these is a self-directed RRSP. This plan is registered in your name and directs all tax benefits to you. A spousal RRSP gives you a tax deduction but is registered in your spouse’s name. Another type of RRSP is the Locked-in RRSP. This plan allows you to manage your pension funds if you decide to leave your employer before retirement.

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The HBP isn’t the only way to use an RRSP. For instance, you can use funds from an RRSP to invest in stocks, exchange-traded funds (ETFs), and mutual funds. You can also invest in bonds, guaranteed investment certificates, or gold and silver certificates.

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Do I Qualify for An RRSP?

There is no minimum age requirement to start an RRSP. One age-related restriction is that investors must close their RRSP one year after they turn 71. If you have employment income, a valid Social Insurance Number, and regularly file tax returns, you should have no problem opening an RRSP account.