According to UBS real estate market report dated September 30, 2019, the Swiss bank giant, put the Toronto housing market 2nd, after Munich, among the cities of the world with real estate bubble risk. The Vancouver real estate market currently ranks 6th on the same list
By any measure, real estate prices are high in Toronto. But those who believe that prices will significantly fall in the GTA (Greater Toronto Area) may only see prices going higher before they will come down. In any case, a decline will eventually happen and by the end of it, prices may still be markedly higher than the general price level at present. Having said this, there is undoubtedly a risk of a significant decline in real estate prices in the GTA and GVA (Greater Vancouver Area). But, if you want to work in one of the cities that are part of the GTA or GVA, there is also a risk for first-time homebuyers in not buying into the real estate market. Rising real estate prices will make it more difficult, or in some cases impossible, to save for the required downpayment or get their mortgage approved.
Nevertheless, the unabated continuing high immigration to Canada, with a large portion settling in the GTA and to a lesser extent in the GVA, may propel real estate prices even higher in these real estate markets in the coming years. Today’s first-time homebuyers are mostly Millenials, defined as born between 1981 and 1996.
As of October 31, 2019 average GTA prices were $1,049,300, $852,669, $676,802 and $617,419 for detached, semi-detached, townhouse and condo homes respectively (source: Toronto Real Estate Board).
In my opinion, if you are a first-time homebuyer with no kids and modest savings, the best way to enter the GTA or GVA real estate markets is to save at least 5% of the purchase price of the condo you like and can afford. For example, if you look for a lower-priced housing than the GTA average-priced condos in the GTA you could find many between $450,000 and $500,000. Your 10% downpayment will cost you, between $45,000 and $50,000 and if you only plan to use a 5% downpayment, half of these figures.
Having less than 20% downpayment, to a minimum of 5%, means that you need to buy mortgage insurance from either Canada Mortgage and Housing Corporation (“CMHC”) or Genworth Financial or Canada Guaranty. If you don’t buy mortgage default insurance you will most certainly increase the mortgage rate that you could obtain with it for your mortgage. The difference between the mortgage rates that you would be able to get with and without mortgage default insurance is significant. Having no mortgage default insurance is more costly to you than paying CMHC (or the other 2 providers) the insurance premium (added to your initial mortgage). The cost of this insurance is 4% of the borrowed amount, if your downpayment falls between 5% and 10% of the value of the purchased home. For example, if your downpayment, for a condo bought for $450,000, is 5% or $22,500 then the CMHC mortgage insurance will cost you an additional $17,100. The CMHC insurance premium is added to the balance of the financed portion of the home price. In this example, the total mortgage of the $450,000 condo would be $450,000 less your downpayment of $22,500 plus the $17,100 mortgage insurance premium resulting in an initial mortgage balance of $444,600.
The question is how to accumulate this $22,500, or if you are more ambitious and want to save a 10% downpayment or $45,000. Luckily there are several incentive programs introduced by the government to help first-time homebuyers to acquire their first home. These beneficial incentive programs are the following:
- TFSA savings
You can withdraw your TFSA savings and use it for a downpayment for your home purchase. There is no requirement to pay your TFSA withdrawal back. Generally, it is wise to invest in your TFSA for the accumulation of savings because you don’t pay any taxes on its returns.
- First-Time Home Buyer Incentive
This program was introduced in the second half of 2019. The program allows qualified first-time homebuyers to receive up to 10% of the home purchase price and so reduce the mortgage that they would need to apply for. This incentive is a shared equity mortgage, meaning that no monthly payment is required until either when you sell the property or 25 years later, whichever comes first. You will need to pay the same percentage of the then fair market value of the home at the time of its sale or 25 years later, whichever comes first. Details of this program are shown below in Table 1.
- Using the RRSP Home Buyer’s Plan (“HBP”)
HBP allows you to withdraw up to $35,000, tax-free, from your RRSP for the purpose of buying your first home. If you have a spouse or common-law partner and each of you is qualified as first time home buyer, each of you can withdraw up to a maximum of $35,000 from their respective RRSPs to buy your home. The HBP withdrawal must be paid back within 15 years. Annually at least 1/15th of the withdrawn amount should be deposited back to your RRSP. These deposits, repaying your withdrawal, don’t qualify for your regular RRSP contribution tax breaks. Details of this program are as shown in Table 2. below:
- Home Buyer’s Amount
You can claim $5,000 for the purchase of a qualifying home in the year of purchase if both of the following conditions apply:
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- you or your spouse or common-law partner acquired a qualifying home
- you did not live in another home owned by you or your spouse or common-law partner in the year of the acquisition or in any of the four preceding years (first-time home buyer)
- Land Transfer Tax Rebate (“LTT”)
In some provinces and cities, a rebate is available to help first-time homebuyers offset the cost of their land transfer tax. For qualified homebuyers, land transfer tax rebates are available in the provinces of Ontario, British Columbia, and Prince Edward Island and the City of Toronto. The maximum LTT is $4,000, $4,475, $8,000 and $2,000 for qualified first-time homebuyers living purchasing homes in Ontario, Toronto, BC and Nova Scotia, respectively. First time home buyers purchasing homes in Toronto may be eligible for both the maximum Ontario and maximum Toronto LTT and could altogether qualify for $8,475 LTT.
For most of the Millenials generation, I believe, the best thing is to invest in a TFSA and use your investment accumulated there for the downpayment of your house. You are probably better off to invest in your RRSP when you making more than $60,000 – $70,000 a year. If you are making less, your tax savings will likely be significantly less than they would be later, in your prime earning years when perhaps you can expect to make $100,000 to $200,000 a year and your marginal tax rate and tax savings on the same RRSP contribution will be significantly higher. Unless you are already a high-income earner, the best thing that you can do is to invest as much as you could in your TFSA and invest for growth and use your TFSA money, partially or fully, when you buy your first home. Also, if you are short for your down payment even with your TFSA money, take advantage of the First-Time Home Buyer Incentive program. After you bought your first home, focus on your TFSA until your marginal income tax rate will reach at least 45%. Only invest in your RRSP then, either from your TFSA or even better from additional savings, if you can.
Get the First Home for Millenials
Last but not least, buying a home needs some sacrifices to save for your downpayment. When you set out to save for your downpayment, first eliminate your credit card debt as you pay higher interest on your credit cards than what you can realistically expect to earn on your investments. Saving is not that easy in our consumerist society. Set aside 10%, 15% or 20% of your net income for saving at each time you are paid and invest it in your TFSA (or RRSP if your marginal tax rate is around 45% or more). Do not let yourself down the path to invest for your downpayment from the leftover of your pays at the end of the month. Chances are that if you save from these “leftovers”, instead of a certain percentage of your income, your savings will either be significantly less or non-existent following that strategy.
Determining what the best strategy is for buying your first home needs careful analysis and planning. Fin-Plan can help you in this regard. To ask any question about this article or to book an appointment to look at your particular case, please contact Miklos at nagy@fin-plan.ca. Miklos is a fee-only financial planner, best selling author, finance-related educational course writer, statistician and former Chair of the Canadian Institute of Financial Planners with over 25 years of experience in financial planning for high net-worth and middle-class Canadians. His Fee-Only financial planning website is at www.fin-plan.ca and his Linkedin page is at https://www.linkedin.com/in/miklos-nagy-fee-only-financial-planner/.
Copyright © 2019 by: Miklos A. Nagy
The views expressed in this material are the opinions of Miklos A. Nagy through the period ended December 1, 2019 and are subject to change based on market and/or other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Investing involves risk, including the risk of loss of principal. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed..
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