House Hunting

I was towelling off at my club when Jack Welsch walked by. Jack and I were at university together and played touch football. As soon as he saw me, he asked if I’d join him for a drink. By the time I came upstairs a few minutes later, he had found a table near the squash courts. We sipped our drinks and watched a couple of men play.

“The winner of the match reminds me of your son Tom” I said.

“He looks like him, but his backhand is better than Tom’s. Anyway, my boy isn’t playing much squash any more. He has other things to worry about. He’s getting married in a couple of months.”

“Congratulations,” I said.

“The kids have it tough these days. They want to buy a place of their own and the prices seem to be rising daily.”

“Prices are climbing because interest rates are so low,” I said. “But there are a few tricks that might make it easier for them to buy something they like.”

“Like what?”

“The Registered Retirement Savings Plan (RRSP) Home Buyer’s program. The program lets people who haven’t owned a home for the last five years borrow up to $20,000 from their RRSP and use it to purchase a residence. Conceivably Tom and his fiance together could generate $40,000 to be used as a down payment on a home.”

“What’s so special about that? Can’t anyone withdraw funds from their RRSP for anything they want?”

“This plan let’s you borrow from your own RRSP — that means you don’t pay any tax on the funds from the plan, and as you repay the loan over time, your original investment is replaced. If you withdrew funds from your RRSP, the amount withdrawn would be taxable and you would lose permanently the ability to replace those funds. In other words, that RRSP room would be lost forever. I know Tom has been working for several years and he worked when he was still in school, so he probably has some RRSP investment room that he hasn’t used.”

“That’s true,” Jack said. “He asked you if he should contribute and you said No.”

“He had very little tax owing when he asked me. I suggested he use a mutual fund as a savings vehicle. When he got a full-time job he could transfer the savings to an RRSP. That way the deduction would be worth more.”

“He has about $15,000 saved. He was planning to use that for his down payment. He made about $25,000 this year. But next year his income will increase substantially.”

“It might make sense to contribute the $15,000 to his RRSP next year, assuming he has the RRSP room. Doing that might lower his taxes by as much as $6,000. Then he could borrow the $15,000 from the RRSP and also use his tax savings for a down payment.”

“Any other tips?”

“Several provinces have assistance programs for first-time home buyers. Under the Ontario program, Tom could open a special account with a bank or trust company. The province provides a tax credit to owners of those accounts. If he qualifies, Tom can earn a credit of up to $500 per year if he saves $2,000 in his account. The program is essentially for low-income purchasers — the credit diminishes when income exceeds $20,000 and it disappears all together when income reaches $40,000. If Tom’s savings are not used for the purchase of a home, the province recaptures the tax credit. But if he does buy a home with the money, the credit is his forever.”

“So Tom and his bride-to-be could get up to $1,000 a year if they used the plan?”

“Exactly. To avoid repaying the credits, they have to buy a house by the end of the sixth calendar year after the year in which the plan is established. Also, owners of these plans are currently eligible for land transfer tax rebates. That brings me to another point. When the kids buy a house, they should be sure to look into the possibility of land transfer rebates since the Ontario government has a history of promoting them for first-time home buyers.”

“Any other thoughts?”

“Haggle. When we bought our homes, you couldn’t negotiate mortgage rates very much. That’s not the case nowadays. On fixed rate mortgages, banks will give fairly substantial discounts to borrowers who ask for them. For example, banks are currently advertising rates at about 6% for five years, but I’ve seen discounts of up to 1 12% off the published rates. The longer terms usually get the biggest discount.”

“That might be because of the large difference between fixed rates and floating rate mortgages.”

“Exactly. Historically people chose fixed rate mortgages as a form of insurance. Now many people take floating mortgages because, even without a discount, they can save substantially. And many floating mortgages will allow the borrowers to fix their payments for five years, so even if rates rise, the borrower doesn’t have to increase their monthly payments.

My final idea is family financing. If you lend the kids money for their down payment, you don’t have to charge them interest. They can enter into an agreement to pay you back on a monthly basis — but if there’s no interest involved, you don’t pay tax on the payments.”

“Sound like a good idea.”

“Discuss it with your lawyers. They may suggest you secure your loan with a mortgage. If the kids default, the security will be useful, and if the marriage breaks down, the mortgage may allow you to recover your funds. If you make a gift to your son that is used to buy a family home, the funds become family property and your daughter-in-law will be entitled to half.”

Jack glanced at his watch and said, “This has been useful Hank, but I’ve got to run. Do you mind if I have Tom call you?”

“Please do. I’d love to catch up with him again. And if he’d like it, we have a memo on this topic.”

Hank Bulmash is a principal in Bulmash Cullemore chartered accountants of Toronto. E-mail: hbulmash@bulmashcullemore.com