Patricia Lovett-Reid

In a recent column, I mentioned that my daughter purchased her first home. It was an exciting, but daunting time for her. I’m happy for her, but I know how difficult it is for anyone trying to break into the housing market. I paid a mere $86,000.00 for my first home. That’s a far cry from the January 2010 average of $328,500.

Price is not the only issue. There are other factors at play. The introduction of the HST on July 1st will make the purchase of a new home more expensive (thought the HST will not apply to resale homes). Also, newly introduced mortgage rules will mean that home buyers will need to stretch their budgets a bit more in making the purchase. Starting on April 19, all borrowers must be able to afford a five-year fixed rate mortgage, even if they opt for a mortgage with a lower interest rate and a shorter term.

I don’t mean to paint a negative picture because it’s not all bad. There are programs designed to help first-time buyers break into the market. Let’s dive a little bit deeper. First, banks currently test all mortgage applicants on a three-year fixed rate mortgage rule. In other words, variable mortgage applicants were already being evaluated as though they were pursuing a fixed-term mortgage. The coming change means that purchasers will need an extra $5,000 to $8,000 in income in order to get approved for that same mortgage.

* Check out our Home buyers’ Guide

To help purchasers, the 2009 Federal budget introduced a non-refundable tax credit for first-time buyers who acquire a qualifying home after January 27, 2009. A 15 per cent non-refundable tax credit on up to $5000 can be claimed for a maximum credit of $750.

For years now, the Home buyers’ Plan has proven quite popular with first-time buyers. It allows you to withdraw up to $25,000 from your RSP, tax-free, for the purchase of your first home. You and your spouse or common-law partner can each withdraw $25,000. A larger down payment then helps you reduce the mortgage interest amount you would otherwise have to pay. Just remember that the funds withdrawn under this plan must be paid back over 15 years, beginning in the second taxation year following the calendar year in which the withdrawal was made.

I recommend trying to repay the HBP as quickly as possible. You can benefit from the compound tax-deferred growth of the money once it is inside an RSP.

Is the HBP right for you? If you’re a first-time buyer and don’t have enough for a 20 per cent down payment, you won’t qualify for a conventional mortgage. This means that you will need to take out a high-ratio mortgage and incur extra costs for Canada Mortgage and Housing Corporation (CMHC) mortgage insurance. If you are in this position, it’s probably in your best interest to use your RSP to increase your down payment if you can then qualify for a conventional mortgage. On the other hand, you may want to assess the impact on your RSP portfolio from the potential loss of tax-deferred compound growth you would have earned if the money was left inside the RSP. However, it could also be argued that you are creating equity in your principal residence, which will also compound tax-free.

* Tool: Compare mortgage and loan rates

It’s often difficult for new home buyers to assess whether or not they can afford the costs of a new house. The CMHC rules provide a good starting point. They say that housing costs should not exceed 32 per cent of your gross monthly household income. Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this should also include half of your monthly condo fees. Secondly, your entire monthly debt load should not be more than 40 per cent of your gross monthly income.

Once you have a rough idea of how much you can afford, solidify the deal with a mortgage pre-approval. This will lock in the mortgage rate for a given time, usually between 90 and 120 days.

Finally, whether or not you’re a first-time buyer, I recommend taking advantage of rapid weekly or bi-weekly mortgage payment options. You will reduce interest costs and pay off the mortgage faster. Being a homeowner can be a wonderful experience. Being a homeowner without a mortgage is even better.