Affordability has been a major concern for many potential homebuyers this year thanks to rising interest rates, high inflation and housing supply issues. Fortunately there are several savings accounts, incentives and rebate programs available. These will help you save for a down payment and other housing costs by building a homeownership strategy.
This is a guide to help you prepare for the biggest financial transaction(s) of your life.
Three savings accounts available for Canadians to help with down payment and other homeownership costs include:
● Registered retirement savings plan (RRSP), Home Buyers’ Plan (HBP)
● Tax-free savings account (TFSA)
● First home savings account (FHSA)
Established more than 30 years ago, the Home Buyers’ Plan enables first-time homebuyers to access funds accumulated in their RRSPs. These funds can be used to help finance the purchase of your first home tax-free. The borrowed funds must be repaid.
The Tax Free Savings Account was first introduced in 2009. This registered investment account represents a flexible, all-purpose savings tool. It allows account holders to contribute and withdraw from a tax-sheltered account easily and without penalty. Tax-free withdrawals can be made at any time for any purpose. There are no withdrawal limits, and there’s no payback requirement. The account holder can use savings as needed and replenish as desired (within the annual contribution amount). Contributions are not tax deductible.
The First Home Savings Account is brand new for 2023. It combines the benefits of both an RRSP and TFSA. It is tax-deductible, and withdrawals are non-taxable. Since the savings are meant specifically for buying a first home, any amount withdrawn for another purpose will be taxed. The FHSA must be closed within a year from when the first withdrawal is made. If the funds aren’t used for a first home purchase within 15 years of opening an account, it must be closed. At this time the funds must then be transferred to an RRSP/registered retirement income fund or withdrawn as taxable income.
Start early, start now
Early saving and investing for the future is key for you when looking to become a homeowner. It is equally as important as making sure you have a full team of experts on your side. In addition to a Realtor, you should have a mortgage broker/agent, financial advisor/planner and real estate lawyer or notary. Your Realtor may also want to be in contact with these other professionals to help during the process. This will allow everyone to save time, and will also streamline the entire real estate process. It will lead to an easier, more seamless transaction.
Plans you set up today will help down the road.
Don’t rely on your parents to learn about the homebuying and mortgage processes. They may be a good sounding board, but everything has changed. Even if they bought within the past five to 10 years, the qualifying rate and required documentation are different. It’s important to have conversations about financing essentials, including credit, qualification and down payment. This information at the onset can save you a lot of future stress. Since an FHSA can be opened as early as age 18, it’s a great way for Canadians to start planning for homeownership early.
Getting clear on financial goals
It is also important for you to speak to someone about financing long before moving forward with a purchase. In this way you can be more confident about how to achieve your financial goals.
Homeownership really needs to be a top priority if it’s going to happen. Some sacrifices may be necessary. In some cases drastic changes, such as a career change, may be in order. Just don’t decide to change your job or career within two years of trying to qualify for a mortgage. You have to have two years of employment history on your income to qualify. It demonstrates stability and reliability to your lender.
Four recommended financial strategies include:
- Clearly track all expenses. This raises awareness, which enables you to compare your actions with your goals.
- Avoid unnecessary bank fees. Research banks that don’t charge fees.
- Automate savings. Start small and ramp up. Every little bit helps.
- Automate investments. If you have the time horizon (at least two years) and the risk tolerance, this works well. The more you can take willpower out of the equation, the better.
The goal of homeownership has become much longer for many Canadians. Meet with the right professionals early. It can make a world of difference if you do this as soon as you have started saving for your first home. Set yourself up for success!