The ABCs of Mortgages

Down Payment

The down payment is the amount of money that you pay upfront towards the purchase of your home. You should have a good idea of how much you can put towards the down payment before talking to a potential lender or broker.

The minimum down payment for the purchase of a home depends on many factors (geographic location, the type of house, its cost, etc).

Normally, the minimum down payment required for the purchase of a single home, a condominium or a two unit home (duplex) is five per cent of the accepted purchase price (or appraised value, whichever is lower). Usually, for the purchase of a three-unit home (triplex) or four -unit, the minimum down payment is ten per cent. However, the less you need to borrow, the less interest you will have to pay.

If your down payment is less than 20 per cent, your mortgage is considered a "high-ratio" mortgage. In this case, the mortgage lender must, by law, require you to purchase mortgage default insurance. If your down payment is 20 per cent or more, your mortgage is considered a "conventional" mortgage and does not, by law, have to be insured. However, a lending institution may still require mortgage default insurance for a high-risk loan, despite the fact that the law does not require it.

Normally, the down payment you make must come from your own funds. If you borrow the money (such as on a line of credit, personal loan or credit card), a higher mortgage default insurance premium applies.See the "Mortgage Default Insurance" section for more details.

Home Buyers' Plan (HBP)

If you are a "first-time homebuyer", the Home Buyer's Plan (HBP) could help you find the money you need for your down payment, or allow you to make a larger down payment on your home.

The HBP is a program administered by the Canada Revenue Agency (CRA) that allows you to withdraw up to $25,000 from your registered retirement savings plan (RRSP) to buy or build a home. Withdrawals that meet all applicable HBP conditions do not have to be included in your income, and your RRSP issuer will not withhold tax on these amounts. If you buy the home together with your spouse or partner, or other individuals, each of you can withdraw up to $25,000.

Under the HBP, you have to repay all withdrawals to your RRSP within a period of no more than 15 years. Generally, you will have to repay an amount to your RRSP each year, starting the second year following your withdrawal, until you have repaid the whole amount you withdrew. If you do not repay the amount due for a year, it will be included in your income for that year.

To be eligible for the HBP:

• You must have a written agreement to buy or build a home. (A pre-approved mortgage alone will not be accepted.)
  
  
• You have to intend to occupy the home as your principal residence.
  
  
• You have to be considered a first-time homebuyer. You are not considered to be one if you or your spouse owned and occupied a principal residence at any time four years before the year (starting January 1) of withdrawal.
  
  
• Your HBP balance on January 1 of the year you withdraw has to be zero.
  
  

  Example:

  In 1995, Jane withdrew $7,500 from her RRSP to participate in the HBP. She chose to make only the minimum reimbursement of $500 ($7,500 ÷ 15) per year. Jane made her first $500 HBP repayment in 1997. Her final repayment will be made 15 years later, in 2011. In January 2012, Jane's HBP balance will therefore be zero. This means that Jane cannot withdraw more funds from her RRSP, as part of a HBP plan, before January 2012.

  
  
  
• You have to make all withdrawals in the same year. Note: If you take an amount from your RRSP in one year and another in January of the following year, the amount received in January of the following year will be treated as if it had been received in the year the first withdrawal was made.
  
  

  Example:

  On October 15, 2001, Mary withdrew $7,500 from her RRSP under the HBP. Before the withdrawal, Mary had entered into a written agreement to buy a home. In March 2002, she withdrew an additional $1,500 to pay expenses she had not anticipated. Because Mary's second withdrawal was made after January 2002, it is not considered an eligible withdrawal and must be included in her income for the year 2002.

  
  
  
• Neither you nor your spouse can have owned the home 30 days before the date of withdrawal.
  
  
• You have to buy or build the home before October 1 of the year after the year of withdrawal. The home is considered "built" on the date it becomes habitable. Note: some extensions can be provided — contact CRA for details.
  
  

  Example:

  On February 20, 2002, Steven withdraws $15,000 from his RRSP under the HBP. Earlier in the same month, he finalized a contract to have his home built. For his withdrawal to be eligible for the HBP, Steven's home will have to be habitable by October 1, 2003. Otherwise, Stephen will have to either get an extension agreement from CRA or include his withdrawal in his income for 2002.

  
  
  
• Your RRSP contribution must be in your RRSP for at least 90 days before you make a withdrawal.
  
  
• You have to be a Canadian resident.
  

Before you make a decision on whether you will use the Home Buyer's Plan, it is important to look carefully at the pros and cons of using your RRSP to buy a home. There are a number of questions you should be thinking about before making such a decision. For example, will you be able to make the annual repayment to your RRSP each year? Is it to your advantage, or is it the right timing to cash in your RRSP (i.e., what is the interest rate you are earning on your RRSP compared with the interest rate on your mortgage)? Is it worth giving up the interest and growth potential of your RRSP in favour of reducing the interest you will have to pay on your mortgage?

Your financial advisor can help you find answers to these and other questions that you may have. You can also find out more about the Home Buyer's Plan by contacting the Canada Revenue Agency (1-800-959-8281, www.cra-arc.gc.ca).