Laura Parsons, a BMO mortgage expert, made a number of excellent points to REALTORS® at a recent seminar on how to work with their clients, especially first-time buyers. She talked about building quotes into house upgrade plans and that the final approved amount would become part of your overall mortgage.
She also emphasized taking advantage of the Home Buyers Plan (HBP), which allows each individual to use up to $25,000 of their RRSPs toward a down payment for a home. A couple can put down $50,000.
The HBP has been instrumental in enabling many Canadians to buy their first home. The Canadian Real Estate Association (CREA) lobbied the federal government to get this important program introduced in 1992, which has helped well over two-million Canadians become homeowners by accessing their RRSPs. In 2009, the federal government adopted CREA’s recommendation to restore much of the plan’s purchasing power lost to inflation, and raised the RRSP withdrawal limit from $20,000 to $25,000.
REALTORS® are currently asking that the plan’s value be solidified by indexing the $25,000 withdrawal amount to inflation. REALTORS® from across the country will assemble in Ottawa at month-end to meet with their respective MPs and present this position. Indexing the HBP to the Consumer Price Index (CPI) in $2,500 increments would ensure it never loses its buying power. A number of other important federal programs, such as the Tax Free Savings Account, are already indexed to the CPI.
Before the plan became a reality, many young people had to choose between saving for their retirement or saving to buy a home. With the HBP, saving for retirement can be realized through homeownership by building equity rather than debt. The HBP requires repayment of the RRSP withdrawal amount over 15 years to avoid taxation, which is a powerful incentive for home buyers to pay it back, and thus protect the integrity of the RRSP program.
CREA is also asking the federal government to consider allowing the use of the HBP after significant life changes, including job relocation, the death of a spouse or a marital split. The HBP already allows Canadians with new disabilities and those who have been out of the housing market for five years to make use of the plan.
Interestingly, a week after the seminar with Parsons, she was quoted heavily in a new BMO national report chronicling the expectations of first-time buyers. Given her strong support of HBP and how successful it has been to Canadians, it should be no surprise that the report showed first-time buyers on average plan to spend $48,000 on a down payment. You can only assume that a number of these respondents have been contributing to their RRSPs and intend to use the HBP to its full extent when purchasing their first home.
The report noted that Manitoba’s average house price for first-time buyers is $259,397, which was the third lowest of all provinces. Only New Brunswick and Nova Scotia have lower average house prices for first-time buyers. British Columbia has the highest at $529,922.
A few of the findings include:
• Two-thirds of first-time buyers say the recent changes to mortgage regulations including reducing the maximum amortization period from 30 to 25 years has not affected their buying timelines. However, one-in-five indicate they will wait longer before buying a home.
• The bank of mom and dad comes into play, as one-in-four first-time buyers still expect their parents to help them pay for their first home. The majority are cutting back to save for a home.
• They are twice as likely to choose a fixed rate over a variable rate mortgage.
• The majority are holding off on buying their first home because of increasing housing prices.
• The same number wish they had bought their first home five years ago.
It would be interesting to use the respondents from Manitoba to go beyond increased house prices and consider higher closing costs, such as the land transfer tax. Manitoba has the highest land transfer tax rate in the country so it really escalates quickly once you purchase a house priced over $200,000.
Lorne Weiss, a past-president of WinnipegREALTORS® and now a regional director of the Canadian Real Estate Association, said: “Notwithstanding the concern of Finance Minister Jim Flaherty on Canadians taking on too much debt, it appears that home buyers are not the risk takers he thinks they are. The average down payment is 15 per cent (based on putting down $48,000 on a $300,000 home), and in spite of historically low interest rates being offered for variable mortgages, buyers are opting for fixed rate terms at a ratio of almost two to one.”