Tired of being on the Tenant Hamster wheel, going around in circles from rental to rental, wondering when you might fall off for good?
In today’s housing market where vacancy rates range anywhere from 0-3% in some areas, and are under 5% in major centers, many tenants are frustrated by the lack of available and affordable rental units. Landlords are often equally frustrated by the ever changing demands and rules placed on them by the Residential Tenancy Act, leading them to end their frustration by selling off their rental properties.

This cycle puts the tenant back on the stressful hamster wheel again to find another suitable rental, in an affordable price range, before the existing rental is sold and they are given notice to vacate. As we hear about the growing inability for many people to find affordable housing, the rate of people living in travel trailers and even tent cities, or couch surfing is on the rise.
This blog will focus on how tenants can start a savings plan to come up with a 5% down payment to enable them to become a home owner. It will also help to educate those same tenants with regards to what will be expected from them; not only on the down payment subject, but with regards to credit requirements, debt servicing on a mortgage, closing costs on your purchase, and some additional topics such as asking a family member to co-sign for your loan, or provide you with a gift towards your down payment and closing costs.

1) How to save for a tax-free down payment while cutting your tax bill and boosting your income tax refund.

a. If you have never heard of an RRSP, research it now. And certainly, if you have not heard about the Canada Revenue Agency’s Home Buyers’ Plan {http://www.cra-arc.gc.ca/hbp/} where first time home buyers can withdraw RRSP funds tax free for a down payment on a home, check it out now.

b. Go to your bank with even $100 or $200 and ask them to open an RRSP for you. Then tell them that you want to set up a preauthorized transfer from your bank account into your RRSP for another $25-$150 from every single paycheque you receive. (Or whatever amount you can squeeze out of your budget.) This will help you start putting away the 5% minimum down payment to go towards your purchase.

c. Every single dollar you put into your RRSP for the calendar year and for the first 60 days of the following year can be deducted from your taxable income on your tax return. This means your income tax refund will be higher than what it would have been before these contributions. Ask your income tax preparer or accountant for a breakdown on what the RRSP has saved you on taxes, and put all of the excess refund amount (or all of it!) into your RRSP again. This is called the power of compounding your savings.

d. When you are ready to purchase a home, you can withdraw up to $25,000 of your RRSP funds under the CRA’s Home Buyers’ Plan to use towards your down payment. You then pay back the money you took out over the next 15 years.

2) Another option for helping to come up with your down payment is a gift from a family member. This can be provided one of two ways:

a. Your family member gifts a portion of your down payment to you at the time of a mortgage approval. This requires the family member to transfer the funds into your bank account and sign a gift letter stating the funds do not need to be repaid.

b. Your family member provides you with funds to place into your RRSP. This option has the same benefits as the RRSP contributions discussed in part 1, but the contributions are coming from a family member. You still get a tax-deduction for the contributions, leading to a larger income tax refund as well. The most important part to remember when using this avenue is timing. Under the CRA’s Home Buyer’s Plan, the funds need to be in the RRSP for a minimum of 120 days’ prior to the purchase of your home. For more information regarding this, you should contact a tax professional.

3) When you are ready to apply for the mortgage, lenders want to see several things from you, in addition to your savings for down payment.

a. A two-year history of your ability to manage credit. Lenders look at your Credit Bureau to see how many credit facilities you have, your payment history, and your credit utilization. The simplest way to explain minimum credit requirements as a rule of thumb is the Power of Two. Lenders want to see at least TWO Credit facilities (Credit Cards, Lines of Credit, Loans, Etc.) that have both reported for a minimum of TWO Years, and have a minimum limit of TWO Thousand Dollars each. Basically, if you only have one credit card that has a $500 limit many Lenders will be reluctant to issue an approval as it does not show them a historic ability to carry debt and repay it on time.

b. You should be sure to keep the balances on your credit cards or lines of credit under 80% of the credit limit. If your limit is $1,000, try to keep your balance under $800. This helps build and increase your credit score, which lenders look at when approving mortgage applications. Your credit cards should also be with a credit union, bank, of major financial institution. Retail, Department Store, or Prepaid Credit Cards are not sufficient in the eyes of many lenders.

c. USE YOUR CREDIT CARD, but use it responsibly as a measure only to build your credit, NOT to accumulate debt. Gassing up your car? Use the card, log into your online banking on your phone and make a credit card payment for the amount you just charged, and don’t forget to do it now! Getting groceries? Do it again!! Getting a haircut? Charge it, log in NOW and pay it off……….get the picture?

4) What is Debt-Servicing?

a. This is quite a complex answer, and it would be beneficial to set up an appointment with one of our brokers and sit down for 30-45 minutes to go over everything.

b. At the basic level, debt-servicing is a calculation that is used to come up with 2-ratios to determine your eligibility to qualify for a mortgage based on your income and the mortgage amount.

5) What are Closing Costs?

a. Closing costs are the costs associated with obtaining a mortgage and purchasing a property. Most of them are out of pocket expenses that can not be added into the mortgage. Some of these include Property Transfer Tax, Legal Fees, Appraisals, Home Inspections, and Property Tax adjustments. Lenders usually want to see 1% of the Purchase Price in funds to cover Closing Costs in addition to the 5% down payment.

Buying a home can be an overwhelming undertaking for many people as there are many different requirements and rules when it comes to getting a mortgage. We urge you to give us a call today to set up a time to meet with a broker, 250-832-8766, or fill out an online application first at www.tekamar.ca/apply. Our services and advice are free to you, and all of our brokers are happy to help educate our clients to help ensure their purchase is as stress-free as possible!