First-Time Home Buyer Loans

The average person will need to borrow money from a financial institution to finance the purchase of their first home. Mortgage loans, as this type of loan is called, are steadily paid off over several years. Here are some things you should know about taking a mortgage loan to purchase your first home:

How interest will be calculated

You have the option of taking either variable mortgage rates or fixed mortgage rate when you request a mortgage. The five-year fixed rate mortgage is most popular. With this type of mortgage, the bank sets your rate for the first five years of your loan.

Fixed-rate mortgages, as implied by their name, remain constant for the length of their term. Even if the bank’s prime interest rate increases, your rate will remain the same. Fixed rate mortgages tend to have higher rates for this reason.

Variable-rate mortgages, on the other hand, change with the bank’s prime rate. Your interest rate will drop if the bank’s prime rate falls, and the opposite will happen if there is an increase.

Down Payment Rules for first time home buyers

“Down payment” refers to the funds a buyer must pay up front when purchasing a home. The down payment is usually a small fraction of the home price. The down payment and the mortgage jointly represent the full value of the home you’re buying. Most financiers will express the down payments as a percentage of the property value. A 20 percent down payment on a home selling for $400,000 would be $80,000. The balance would be 80 percent or $320,000, and this would comprise the mortgage.

In Canada, there are guidelines as to how much a homebuyer must have as a down payment. The amount you must pay upfront depends on the purchase price of the home:

  • The minimum down payment for homes costing less than $500,000 is 5 percent
  • The minimum down payment for homes costing between $500,000 and $1,000,000 is 5 percent of the first $500,000 and then 10 percent of the excess
  • The minimum down payment for homes costing more than $1,000,000 is 20 percent

The amount of your down payment will affect the size of your mortgage, and will also determine whether or not you need CMHC insurance.

CMHC Insurance

If you’re a homebuyer in Canada and your down payment is less than 20 percent, you will be required to get mortgage default or CMHC insurance. This safeguards the institution you borrowed from in case you default on your mortgage.

If your down payment is 20 percent or more, you won’t need CMHC insurance. This insurance product is not available for homes costing more than $1,000,000.

First-Time Home Buyer Programs

It’s important to become familiar with different programs established to help first-time homebuyers if you fall in that category. You need to know how to get through the purchasing process and possibly save yourself some money, whether it’s a tax-efficient method of funding your down payment, a rebate you may qualify for, or the minimum you must put down for your home purchase.

RRSP Homebuyers’ Plan for first time home buyers

You might qualify for the government’s Homebuyers’ Plan if you have not bought a house during the last four years (or resided in a house owned by a spouse during that time). You can borrow as much as $25,000 from your RRSP to use towards your down payment, and it’s tax-free. In order to use this option, you must have enough funds in your RRSP at least 90 days prior to purchasing your home.

Early drawings from RRSPs are generally regarded as taxable income, so this plan is beneficial to Canadians. Homebuyers are exempt from being taxed once the money is taken under the plan, but they must start paying back the RRSP loan after two years over a maximum period of fifteen years.

Land Transfer Tax Rebate for First Time Home Buyers

If you live in Ontario, British Columbia, or Prince Edward Island you can get a refund on a portion of land transfer taxes paid. Along with the provincial rebate, City of Toronto residents is also entitled to get a refund of the city’s land transfer tax. This rebate only applies if you’re a first-time homebuyer, and the amount you get back depends on your location.

Tax Credit for First-Time Home Buyers

Since 2009, first-time homebuyers in Canada have been given the chance to recoup a portion of the costs related to their purchase. Inspections, legal fees, and other costs of a similar nature can be offset using this credit. This tax credit is non-refundable and comes up to about $750.

Rebate of GST/HST for New Housing

Canadians who significantly refurbish an existing home, purchase a recently built home, or reconstruct a home previously devastated by fire can claim this rebate. Homeowners would normally pay GST/HST on any purchases they make in all three cases. These Canadians can get a rebate on the GST paid for a renovation or the purchase of a new home.

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