Back in May, CHMC released a report outlining some of their projections for the housing market during COVID. Some of the things mentioned were a decline in housing prices and a decline in housing starts. Although that may have been the immediate effect, it seems that the housing market has fared alright.

From our experience in rural Manitoba, over the last 6 months, it seems like a lot of houses have sold. We are not real estate agents or lawyers so may not have the full picture.

However, according to CREA, sales across the country seem to be up. So the CMHC projections were right at the onset, however, the projected rebound seem to happen a lot sooner then they expected.

Due to this rebound and the apparent demand in the housing market, CHMC updated their underwriting criteria.

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CMHC Updates Underwriting Criteria

In response to the pandemic and what was happening in the housing market, CMHC updated their underwriting criteria in July. The hope was/is to constrict demand, in turn keeping home prices in check.

The key changes that were made by CMHC , include:

• Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42;
• Establish a minimum credit score of 680 for at least one borrower; and
• Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.

Like many, you may be wondering what non-traditional sources of down payments are. This includes the likes of any sources that are arms length to and not tied to the purchase or sale of the property, such as borrowed funds, gifts, 100% sweat equity, lender cash back incentives.

On the other hand, traditional sources of down payment include; applicant’s savings, RRSP withdrawals, funds borrowed against proven assets, sweat equity (<50% of min. required equity), land unencumbered, proceeds for sale of another property, non-repayable gifts from immediate relative, equity grant (non-repayable grant from federal, provincial or municipal agency).

In addition to the changes noted above, there was a change made to the refinancing of mortgages on multi-unit mortgages. Refinancing has been suspended except when the funds are used for repairs or reinvestment in housing.

RRSP Home Buyers

If you notice above, RRSP withdrawals were referenced separately from personal savings. You may be wondering why since RRSP are a form of personal savings.

Well, there is a federal program called the RRSP Home Buyers Plan (HBP). We have previously mentioned the RRSP HBP, most recently in RRSP: When and Why You Need Them. However, previously we have not gone into too much detail. With the current mortgage rules and the exclusion of non-traditional sources of down payments, the RRSP HBP may increase in popularity.

We have talked briefly about RRSP Home Buyers Plan in the past in RRSP: When and Why You Need Them

RRSP HBP Basics

The RRSP Home Buyers Plan is a program that allows you or a related person with a disability to withdraw up to $35,000 from your RRSP to buy or build a qualifying home.

Any amount that is withdrawn, must be paid back within a 15 year period. Furthermore, no tax is withheld when funds are withdrawn under the HBP. This is a critical difference from regular RRSP withdrawals where taxes must be withheld.

In addition to no taxes being withheld, the HBP withdrawal is not considered income for tax purposes. Again, this is unlike a normal RRSP withdrawal where the amount is withdrawn must be reported on your tax return.

There are certain conditions that must be met in order to be an eligible participant in the HBP, these include:

• You must be considered a first time home buyer.
• There must be a written agreement to buy or build a qualifying home.
• You must be a resident of Canada when the funds are withdrawn.
• You must intend to occupy the property as your primary residence within one year of buying or building.
• In all cases, if you have previously participated in the HBP, you may be able to do so again if your repayment balance is $0 on January 1 of the year of withdrawal and you meet all other eligibility conditions.

Using the RRSP Home-Buyers Plan More Than Once

This may seem a little strange considering the first piece of criteria is that you must be a first time home buyer. However, the definition used does not mean that it has to be the first property you have ever bought.

The the full definition according to Canada.ca is: Unless you are a person with a disability or you are helping a related person with a disability buy or build a qualifying home, you ahve to be a first time home buyer to withdraw finds from your RRSP(s) to buy or build a qualifying home under the Home Buyers’ Plan.

You are considered a first-time home buyer if, in the four year period, you did not occupy a home that you owned or one that your current spouse of common-law partner owned.

So maybe six years ago you bought a house using the RRSP Home Buyers’ Plan. You lived there for two years then sold the house. You paid off the remainder of the RRSP HBP balance and then proceeded to rent for four years. In this case, if you decided to buy another house, you would most likely qualify for the HBP again.

Withdrawing Funds Under the HBP

Now that we know who can withdraw funds under the HBP, how is the process actually done? It is actually quite simple.

To make the withdrawal, you must fill out form T1036, Home Buyers’ Plan (HBP) Request to Withdraw Funds from RRSP. This form must be filled out for each withdrawal.

It is important to note that by participating in the Home Buyers’ Plan, certain rules limit the deduction of your RRSP contributions made during the previous 89 days.

Repaying the HBP

Once you have withdrawn the money and purchased/built the house, repayment will need to eventually begin. As mentioned earlier, any amount that is withdrawn must be repaid within 15 years. Those funds can be repaid into either an RRSP, Pooled Registered Pension Plan (PRPP) or a Specified Pension Plan (SPP).

Repayment starts in the second year after the year funds were first withdrawn. Funds withdrawn in 2020, repayment starts in 2022. However, you can start paying it back earlier. Doing this will decrease the amount that must be paid back in the first year but the repayment period will stay the same.

So how much do you have to pay back each year? Well every year, CRA will send you a HBP statement with your notice of assessment. That statement will show; 1) how much you have repaid already, 2) remaining balance, and 3) the amount that must contributed in the following year.

Any amount that is repaid, does not affect your contribution room for that year. The annual repayment deadline is the same as the contribution deadline. Repayments must be made in the calendar year or the 60 days following.

You can repay more than the required annual amount if you so desire. Doing this will reduce the remaining HBP balance for future years.

On the other hand, if you decide to pay less than the annual repayment amount, the difference is reported as RRSP income on your tax return. That means if you are required to pay $1,500 this year and you only repay $750, you will have to report $750 of RRSP income.

Conclusion

Purchasing a house is a big decision. For most people, it is the biggest financial decision they will ever make. Coming up with a down payment, especially with the updated criteria, can be challenging. Before you buy a house, sit down with your financial advisor. Plan out a course of action and see if the RRSP Home Buyers Plan is a good option for you.

Sources:

https://www.urbaneer.com/blog/mortage_rule_changes_buying_power_pandemic_canada

https://www.cmhc-schl.gc.ca/en/housing-observer-online/2020-housing-observer/2020-housing-market-outlook-special-edition

https://www.cmhc-schl.gc.ca/en/media-newsroom/news-releases/2020/cmhc-reviews-underwriting-criteria

https://www.savvynewcanadians.com/stricter-mortgage-rules-2018-will-affect-home-buyers/

https://www.canada.ca/en/financial-consumer-agency/services/mortgages/borrow-home-equity.html

https://tradingeconomics.com/canada/housing-starts

CMHC tightens mortgage rules in latest response to COVID-19