The First-Time Home Buyer – What are the Options Available to Buy a Home in Canada?
May 19, 2020 | Written by: Sohail Afzal
Before you decide to buy your home in Canada, you need to ensure that you are aware of all the options available to you and you weight out each option. Your research should be primarily focused on comparing the benefits of Buying Vs. Renting. You should also ensure that you are financially strong enough to make the home buying decision. Home buying in Canada can be complicated as you never know what if the mortgage rates go up, would you still be in a position to continue making your mortgage payments?
The upsides of homeownership are that many Canadians consider their home to be a long-term investment. In Canada, property prices have shown an upward trend in recent years. However, the stock market returns are more when it is compared with the return that you generate from the sale of your property over the same period. You can also build your equity in your home over time and can also use that equity in borrowing at low-interest rates to invest in stock markets for higher returns.
Before you proceed further, GTA Accounting would suggest you look for how much initial funds do you have for your home. You need to set aside a budget to make the down payment and other additional costs associated with your home buying decision. There are a few options that you can avail to buy a home in Canada as mentioned below:
Real Estate Mortgage
As the mortgage involves a large amount of money that a bank lends you for the purchase of property, the bank has the lien on your property. This means that your home is considered a collateral security in exchange for the loan. If you are unable to meet the terms of your mortgage contract, the bank will have the right to take possession of your property.
Real estate mortgages have 02 parts; the ‘principal’ is the amount borrowed and the ‘interest’ is the cost of your borrowings. The most common type of property mortgage is the Fixed Rate Mortgage where the interest rate on your mortgage loan is fixed thought out the mortgage term and it accounts for almost 60% of all mortgages people of Canada are most likely to enter into it. When you fully amortize your mortgage plan, the property comes 100 percent under your ownership.
Tax-Free Savings Account (TFSA)
Investment in a TFSA account can have greater benefits because the income earned through the TFSA account is Tax-free and you can also withdraw funds from this account at any time without any tax implications. When you feel that you have no debt burden and that you have no liquidity problems, you can use your TFSA funds to support your decision to buy a home in Canada.
Registered Retirement Savings Plan (RRSP)
RRSP Home Buyers’ Plan is a program that allows you to withdraw from your RRSP to buy or build a home for yourself. If you are contributing to more than one RRSP accounts, you can withdraw funds from each of your RRSP accounts. There would be no withholding tax if you withdraw funds up to $35,000 or less. There are certain conditions that you need to fulfill to be eligible to participate in RRSP Home Buyers’ Plan which is mentioned below:
- RRSP home buyers plan supports for only the first-timers
- You must have a written agreement to buy or build a home
- You must be a resident of Canada at the time of participating in this plan
If you comply with above-mentioned conditions, you are good to go with your decision to buy the first house using your RRSP Home Buyers’ Plan.
Savings on Tax Refund
The more you save on your tax refunds, the greater impact you can have on your down payment goals. You can use the tax refund to invest in RRSP and let the funds grow there tax free. Contributing towards RRS will further reduce your tax bill resulting in more tax refund which can be put towards the RRSP. Later you can withdraw $35,000 tax free from your RRSP towards your down payment. So investing your tax refund towards RRSP is a win – win all around.
If you want to buy a home in Canada, you must consult a tax consultant as they can better prepare you for this decision, bearing in mind all the tax implications. Do not hesitate to reach out to us at GTA Accounting for an initial consultation session to support your decision to buy a home in Canada.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.