For pre-sale homebuyers, financial clarity is key. It’s crucial to develop and follow a clear financial plan that factors in income and expenses when purchasing any home. Just as homebuyers should seek a full understanding of their mortgage structure and insurance details, so should they be aware of the options available to help them prepare for deposit and mortgage payments. In order to see the full picture, homebuyers can seek help from a variety of financial professionals and resources to proceed with confidence in both the big picture and in the finer details.
UPFRONT EXPENSES: THE PRE-SALE DEPOSIT
When purchasing a pre-sale home, you will be asked for a deposit to secure the sale. Rather than paying an upfront sum in the form of a down payment, as in a re-sale purchase, the pre-sale deposit is comprised of a few smaller amounts paid on an established schedule. Usually, the pre-sale deposit makes up 15 to 25% of the total purchase price, paid in installments at pre-determined stages. Typically, a first payment is requested upon creation of a sale offer. This first payment triggers the beginning of the mandated seven-day recission period. The pre-sale deposit does not supersede a down payment. Paying a deposit to the developer and paying a down payment to qualify for a mortgage loan are usually two unrelated pieces, as a mortgage lender may request additional funds outside of the pre-sale deposit. While it can seem overwhelming, there are options to support saving for deposits and mortgage down payments.
THE HOME BUYER'S PLAN FOR RRSPs
More and more first-time buyers are using RRSPs and TFSAs to save up their deposit dollars. The federal government’s Home Buyer’s Plan allows Canadians to remove up to $35,000 per person from their RRSP to support a purchase of a home. To do so, you must provide a signed agreement demonstrating you are buying a qualified home. This withdrawal is tax free, as long as it is repaid to the RRSP over 15 years with set minimum yearly payments. This program allows you to draw from your existing resources in a tax-free deduction, but you must be diligent about re-payment to avoid penalties. It’s also important to consider the future tax-sheltered growth potential you will sacrifice when removing growing funds from the RRSP.
TAX FREE SAVINGS ACCOUNTS
When saving for a deposit, TFSAs are the preferred choice of many Canadians. Withdrawals are tax-free, and you may remove funds without penalty and replenish them later on your schedule. While the Home Buyer’s Plan has a limit of $35,000 withdrawal, TFSAs do not have a limit. Ultimately, they are more flexible than RRSPs when it comes to withdrawing for a down payment or deposit. TFSAs can be accessed at any time and under any circumstances. However, money in a TFSA may see a higher return rate than money in an RRSP, and because a TFSA is more easily accessed, it may make sense to leave TFSA funds ready for emergencies.
CONSOLIDATION OF DEBT
A debt consolidation mortgage is a long-term loan that gives you the ability to pay off multiple debts at one time by borrowing additional funds from a new mortgage. This leaves you with one loan to pay, rather than several. This option is particularly useful for those holding high-interest loans, such as credit cards. The mortgage lender will usually settle all debts with creditors upfront and collect payments for that amount after. Debt consolidation is a great way to streamline your finances and pay off high-interest loans to save on interest rates and monthly payments.
FINANCIAL PROFESSIONALS AS DEPOSIT RESOURCES
Pre-sale homebuyers, especially first-time purchasers, need not make their financial plans alone. Many financial experts are available as valuable resources in the path to a pre-sale purchase. Nest Mortgage, Vancouver’s expert in pre-sale mortgages, is a great first stop in the educational journey. Their brokers are able to take a full look at your financials and provide recommendations around saving timelines, deposit sources and payment options. Of course, it’s always wise to seek multiple opinions. Set an appointment with your bank (or multiple banks) to see what their financial advisors recommend for your individual situation. Speak with your realtor to discover how their other clients have navigated the deposit and mortgage structure. Ultimately, total clarity of options available to pre-sale homebuyers is a crucial first step to setting a realistic and effective plan for any pre-sale purchase.