After my last post which discussed the risks associated with the BC Home Partnership Loan, I received a lot of questions about how and when consumers can be creative and use this interest free loan to their advantage. Although using this program definitely has its risks, there are also a few scenarios where a bit of creativity can either create new options for consumers, or save them money in the long term. I thought with this post I would create a few case scenarios of how this can be achieved.
Case 1: Using the program to lower your CMHC premium
The CMHC insurance premium one pays can drop down if one can move from a 10% down payment to a 15% down payment. Although this premium is typically added to the mortgage amount and is not an upfront cost, if consumers can lower their CMHC premium significantly, they will come out with more money in their pocket when they eventually sell their home. It should be noted that specifically with this program, moving from 5% down to 10% down does not have the same affect.
Sarah and John have saved 10% of the down payment required to purchase a home for $500,000. If they are to use the BC Home Partnership Loan to get an additional 5% (for a total of 15% down), their CMHC premium would drop from 2.4% down to 1.8% on the mortgaged amount. In this specific scenario, it would drop their CMHC premium down by $3150.
Even though they would be able to drop their CMHC premium by $3150, Sarah & John need to also consider the registration and legal costs they would be incurring to participate in the interest free loan program (could be as much as $1000). Plus, to realize these savings, they would need to be comfortable with paying off the $25,000 loan during the 5 year interest and payment free period.
Case 2: Using the program to free up liquidity, or give yourself a 5 year interest free renovation loan
For consumers who already have saved up the necessary down payment, they could use this program to create more liquidity, or even give themselves a 5 year interest and payment free renovation loan. With extra liquidity, they could have a bit extra capital for furnishing their new home, or even conduct some renovations if their new home needs a bit of TLC.
Rishi and Jenna have saved up $60,000, enough to put 15% down on a $400,000 home, but they are finding that in the area they want to live, that only gets them homes that require a bit of updating, and they don’t have the funds to do that currently.
Rishi and Jenna could take a $20,000 loan through the BC Home Partnership Loan. They would still be putting 15% down, just like they were before, but 10% would be from their own funds, and 5% would be from the BC Home Partnership Loan. This would leave $20,000 in their savings liquid, which would free up capital for the updating required on a home in the area they want to purchase in.
This use of the program would allow Rishi and Jenna to still purchase in the area they desire to live in. They would have to absorb the the legal costs involved (could be up to $1000) to register the BC Home Partnership Loan, and also be comfortable with being able to pay down the $20,000 of debt they are taking on during the 5 year interest and payment free period.
Case 3: Leveraging the RRSP Home Buyer’s Plan tax refund to pay down a big portion of the loan.
For anyone who is unfamiliar with the RRSP Home Buyers Plan, I would first recommend reading my blog post here to get an understanding of how the program works. Using the RRSP Home Buyer’s Plan with careful planning and creativity, one could receive a large tax refund in the year after they purchase. They can then redirect their tax refund to pay down a significant portion of the BC Home Partnership Loan they take out.
For example, Dave makes $60,000 a year as a nurse, and would like to buy a $350,000 condo. He has saved up $47,000 of his own funds, but would like to put $52,500 down to get to 15% down to lower his CMHC premium. He would also need an additional $2000 for closing costs. Dave is skeptical of the BC Home Partnership Loan and does not want to put himself in a position with a large loan to pay back over top of his first mortgage. How can he creatively use the RRSP Home Buyer’s Plan & the BC Home Partnership Loan in conjunction to get the funds he needs without acquiring a sizable second mortgage?
Step 1: Three months before his purchase, Dave would make a $20,000 contribution to his RRSP. This would lower his taxable income in the year the contribution is made from $60,000 down to $40,000, and would also satisfy the RRSP Home Buyer’s Plan condition of having the funds in an RRSP three months before withdrawal for down payment.
Step 2: Dave would then get pre-approved for the mortgage he would like to acquire, and then apply for a $7500 loan through the BC Home Partnership Program ($5500 would go to getting to 10% down, and $2000 would assist him with closing costs). Once approved for both, he could then move forward and purchase his home. For the purpose of a down payment, Dave would be able to withdraw the $20,000 he contributed to his RRSP without incurring any tax exposure.
Step 3: The following year after filing his taxes, Dave receives a sizable tax refund of $5350. He could direct all these funds to paying down his BC Home Partnership Loan, leaving him with a balance of $2150 to pay off over the next 5 years.
Using these two first time home buyer initiatives in conjunction with one another allows Dave to enter home ownership earlier, and also reduce his CMHC premium by putting 10% down, opposed to less than that. By using the RRSP Home Buyer’s Plan strategically, Dave would be able to pay off the bulk of the interest free loan fairly quick. He would have to absorb the legal costs involved (could be up to $1000) to register the BC Home Partnership Loan, and would also be committing to replenishing the $20,000 he withdrew from his RRSP’s back over the next 15 years.
If you have questions related to this article, or any other mortgage related topics, email me at email@example.com or give me a call or text at 778-822-5466, and I would be happy to help!