Non-standard mortgages an option for some
According to Gagnon, another option, which can reduce your minimum down payment to zero is to opt for a non-standard mortgage offered by aggressive financial industry players such as Toronto's Xceed Mortgage Corporation.
Non-standard mortgages are perfect for people with large earning power but few capital resources, such as a student who has just finished his doctorate, or an entrepreneur whose assets are mostly invested in her business.
Non-standard lenders will finance the entire purchase price of your house as long as your total monthly financial commitments (debt, interest, taxes and so on), are no higher than 40 per cent (and in some cases as high as 50 per cent) of your monthly income.
Although non-standard loans offer a lot on the plus side, you'll pay for those advantages. According to Gagnon, the interest rate on a five-year non-standard loan mortgage brokered by Multi-Prêts will run you 7.4 per cent a year.
Using your RRSP savings toward your down payment
One big must for all potential home buyers is to max out their Registered Retirement Savings Plans, says one financial expert.
"Normally, money taken out of your RRSP is included in your taxable income at the end of the year," says Heather Evans, a tax partner at Deloitte Touche in Toronto. "But you can also use RRSP money to help purchase your first home."
Evans is referring to a Canadian income tax provision known as the Home Buyers Plan. Under the plan, buyers can withdraw a maximum of $20,000 from their RRSP and apply it toward their first home. If the home is purchased with a spouse, each person can withdraw $20,000, for a total of $40,000. And the good news is the entire amount can be used as a down payment.
Certain conditions apply, though. For example, the person must be a Canadian resident and must intend to occupy the house as a principal residence. The home must be built or occupied before October 1st of the year following the withdrawal. And the amount must be generally repaid to the RRSP over 15 years beginning the year after the withdrawal.
Experts say renters should save a minimum of 10 per cent of their income, putting as much as possible into their RRSPs, and, if possible, set aside their tax refund to help provide extra cash for incidental moving expenses such as notary fees and renovations.
Whatever the method used to come up with the down payment, experts continue to urge Canadians to stop paying rent.
"There are so many advantages to homeownership," says Evans. "It offers stability, diversification and an opportunity to put aside money for your retirement."
"It's like a forced savings plan," she says. "We find that people who are tenants do not have as many financial resources available when they stop working. But homeowners always have the option of selling their home and living off the proceeds."
Peter Diekmeyer is an independent business journalist based in Canada. He is the Montreal Gazette's management columnist and writes regularly for numerous Canadian trade publications.
|-- Posted: Dec. 31, 2003