Use your RRSP to help clear the down-payment hurdle

With Canadian mortgage rates drifting to all-time lows and housing prices on the upswing, renters are struggling as never before to accumulate down-payment money to get into the market. Fortunately, in recent years it's getting much easier.

"Lenders are getting much more flexible in their approaches," said Ginette Gagnon, a mortgage broker with Multi-Prêts Hypothèques. "New products are coming out all the time."

With mortgage interest payments not tax deductible in Canada, Canadians tend to be more conservative toward mortgages than Americans. Down-payments are larger and debts are paid off faster.

According to Gagnon, in Canada, a traditional mortgage as defined by the big banks is one in which the buyer puts down 25% of the property's value in cash. That's a big chunk of change for young families to come up with, but the benefits are enormous.

With a little shopping, traditional mortgage customers get access to the bank's posted interest rates less about one percentage point and sometimes more. For example Multi-Prets is currently offering customers a five-year rate of 5.1% compared to big bank's posted rates of 6.5%. That works out thousands of dollars of savings over the life of a mortgage.

One good way to cut the minimum down-payment required is to get a Canada Mortgage Housing Corporation insured mortgage, which can reduce the amount you have to put down when you buy a house from 25% of the purchase price to as low as 5%.

CMHC-insured mortgages operate similar to traditional mortgages except that the additional loan amount (the difference between the traditional 25% down-payment and the actual down-payment) must be insured by the Canadian Mortgage Housing Corporation. The cost of this insurance is a one-time payment varying between 1% and 3.25% of the total loan amount depending on how large the down-payment was.

According to Gagnon, another option, which can reduce your minimum down-payment to zero, is to opt for a non-standard mortgage offered by aggressive financial industry players such as Xceed Mortgage Corporation.

Non-standard mortgages are perfect for those with large earning power but few capital resources, such as a student who has just finished his doctorate, or a entrepreneur whose assets are mostly invested in his business.

Non-standard lenders will finance the entire purchase price of your house as long as the total monthly financial commitments (debt, interest, taxes and so on), are no higher than 40% (and in some cases as high as 50%) of your monthly income.

Although non-standard loans offer a lot on the plus side, you'll pay for those advantages. According to Gagnon, a five-year non-standard loan mortgage brokered by Multi-Prêts will run you 7.4% a year in interest payments.

One big must for all potential home buyers is to max out their Registered Retirement Savings Accounts said one finance expert.

"Normally money taken out of your RRSP is included in your taxable income at the end of the year," said Heather Evans a tax partner at Deloitte Touche. "But you can also use RRSP money to help purchase your first home."

Evans is referring to a Canadian Income Tax Code provision known as the Home Buyers Plan. Under the plan, buyers can withdraw a maximum of $20,000 from their RRSP and apply it towards their first home. If the home is purchased with a spouse or common law wife, each person can withdraw $20,000, for a total of $40,000. And the good news is that the entire amount can be used as a down-payment.

Certain conditions apply. For example the person must be a Canadian resident and must intend to occupy the house as a principal residence. The home must be built or occupied before October 1rst of the year following the withdrawal. And the amount must be generally repaid to the RRSP over a 15-year period beginning the year after the withdrawal.

Experts say that renters should save a minimum of 10% of their income, putting as much as possible into their RRSPs, and (if possible) setting aside the balance to help provide extra cash for incidental moving expenses such as notary fees, renovations and so on.

Whatever the method used to come up with the down-payment, experts continue to urge Canadians to become home owners.

"There are so many advantages to home ownership," said Evans. "It offers stability, diversification and an opportunity to put aside money for your retirement."

"It's like a forced savings plan," said Evans. "We find that people who are tenants do not have as many financial resources available when they stop working. But home owners always have the option of selling their home and living off the proceeds."


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