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New developments for first-home buyers - DFSIN - SFL

New developments for first-home buyers

If you’re planning to buy your first home, you should take note of the recently announced changes to the Home Buyers’ Plan (HBP) and mortgage lending rules. 

June 06, 2024

Among the many announcements included in the budget tabled in April 2024 by federal Finance Minister, Chrystia Freeland, two are of particular interest for future first-home buyers.  

Let’s take a look at them. 

The HBP goes up to $60,000 

The Home Buyers’ Plan (HBP) allows eligible individuals to make tax-free registered retirement savings plan (RRSP) withdrawals for use as a down payment on a first home. It’s a little like getting an interest-free loan from your own RRSP, to be repaid over the next 15 years.  

What has changed with the latest budget? Previously, the maximum amount an individual could withdraw under the HBP was $35,000, but this has been increased to $60,000. This means that a couple with enough savings in their RRSPs could now withdraw a grand total of $120,000, i.e., $50,000 more than before. As well, the clock only starts running on the 15-year repayment time limit after a grace period. In the latest budget, this grace period, which is normally two years, has been increased to five years if the withdrawal falls between January 1, 2022 and December 31, 2025. 

What you need to know 

This new limit could enable buyers with substantial RRSP savings to make a higher down payment when buying their first home, which could make an appreciable difference in a market where prices are steep. It might even allow these buyers to do without mortgage insurance from the Canadian Mortgage and Housing Commission (CMHC), which is required when a down payment is less than 20%. (This insurance can represent 0.60% to 4.00% of the mortgage amount, but the CMHC website notes that an insured mortgage generally qualifies for lower interest rates and administrative fees. Diligent number crunching is recommended). 

However, it’s important to keep in mind that any money withdrawn from an RRSP will not be generating any returns until it is repaid into the RRSP and reinvested. This means sacrificing some retirement savings to get a smaller mortgage with a potentially lower interest rate. Will the interest saved and the property appreciation offset the loss of investment returns? That’s a complex calculation that depends on your investor profile, and your advisor can help you with that. 

Finally, future buyers with some years ahead of them would do well to remember another tool at their disposal: the First Home Savings Account (FHSA). Which one should you choose? Can they be used together? For more information, read this article

The maximum amortization has been increased to 30 years 

Until now, only buyers with a down payment of at least 20% could opt for an amortization – i.e., the period for repaying a mortgage – of 30 years. Otherwise, buyers not only had to take out insurance with the CMHC, as noted above, but were also limited to an amortization period of 25 years. Under the new rules, starting August 1, 2024, these buyers, too, will be able to opt for amortization of up to 30 years. 

What you need to know 

A longer amortization generally results in lower scheduled payments, which can give you some financial breathing room in the short-term. Or you could decide to have a longer amortization in order to buy a more expensive property while keeping your scheduled payment at a manageable level. 

On the other hand, it means that you would be taking longer to repay your mortgage and would thus be paying more interest compared to a shorter amortization period. Here’s an example that speaks for itself:

If you can afford it, a shorter amortization is generally recommended in order to reduce the total cost of interest. As illustrated by our example above, this home that was purchased for $500,000 could end up actually costing over $891,000 after 30 years due to the interest, while the cost would be just under $678,000 if it could be paid off in 15 years instead.  

As with decisions on the use of the HBP and FHSA, the choice of term and amortization must be calculated taking into account other aspects of your financial situation and your long-term plans. The purchase of a property is an ideal time to review these issues with your advisor.