The federal government recently announced new measures intended to make it easier for first-time home buyers to enter the market; but just how effective will these new measures be? Let’s take a look.

The first measure they announced is an extension on amortization schedules on insured mortgages. As of August 1st, first-time home buyers purchasing newly built properties can stretch their amortization over 30 years instead of the usual maximum 25. For those who meet the requirements this would effectively reduce their monthly mortgage payments, which should at least in theory, make it easier to qualify and provide some cash flow relief. It should be noted that only insured mortgages are eligible for the extended amortization, meaning only those who put down less than a 20% down payment or purchase properties worth less than $1 million will qualify. This might be great news if you live in a city like Lethbridge where you can buy a fully detached home in a desirable neighbourhood for less than $400,000, but for my friends in Toronto and other major cities where new builds are often priced over $1 million your odds of getting an insured mortgage are much lower. The other thing is the longer your amortization schedule, the more interest you ultimately pay so while this new offering might alleviate some cash flow constraints in the short-term, it’ll likely cost you in the long run. It will be up to the individual home buyer to decide what’s more valuable to them.

The government also announced two changes to the First Time Home Buyers Plan, a program that allows you to access your RRSP on a tax-free basis when you purchase your first home. Under the old rules, if you qualified as a first-time home buyer you could borrow up to $35,000 from your RRSP tax-free. If you had a partner they could also withdraw the same amount, meaning couples could potentially access up to $70,000 total for their down payment. Home buyers then had 15 years to repay the borrowed amounts, with the clock starting two years after the year the funds were withdrawn.

Under the new rules the program still functions in much the same way but with two key changes. The first is that each first-time home buyer can now access up to $60,000 from their RRSPs, up from the previous limit of $35,000. This means a couple buying a home together could potentially borrow $120,000 for their down payment. This might be good news if you’ve managed to build up that much in RRSP savings, but in my practice I can’t say I come across many renters in this position, unless they happen to have a work sponsored plan, which is becoming increasingly rare.

The second change applies to the grace period given to first time home buyers before they have to commence repayments. Where before you had two years the government has now extended it to five years, but not for long. This extension only applies to HBP withdrawals made from 2022-2025. That’s right – if you bought a home in the last two years and withdrew from your RRSP under the Home Buyer’s Plan, you now have 3 extra years before you have to start making repayments. Let’s say you do happen to have $60,000 in your RRSP, and let’s say you have a partner who also has $60,000 in their RRSP. How might things look if you were to withdraw the full $120,000 and put it down on a $600,000 home?

Assuming a mortgage rate of 6% amortized over 25 years (because there isn’t yet a mortgage calculator for payments over a 30 year period), your monthly mortgage payment will be about $3,100. Depending where you live this might already be substantially more than you currently pay in rent. Add in property taxes/condo fees and you could be looking at closer to $3,500 a month or more. In 5 years you and your spouse will need to start making repayments to your RRSP, which combined will cost $8,000 per year or $665 per month, for the next 15 years. This brings your monthly outlay up to a whopping $4,165 per month, and that’s before you account for things like hydro, utilities and maintenance.

Whether or not this is affordable/reasonable will depend on the circumstances of the individual home buyer. The added flexibility is nice, sure, but it certainly isn’t a one size fits all solution. I expect that moving forward financial planners like myself will be tasked with helping our clients calculate their optimal down payment amount taking into consideration things like mortgage rates, insurance, monthly costs and RRSP repayment plans.

In the meantime here are some things a couple in this position could do to reduce their monthly costs:

• Open First Home Savings Accounts and transfer $8,000 each (ie: the maximum allowable contribution amount) from their RRSPs. The transfer itself is tax neutral and would reduce their repayment obligations by $16,000, or roughly $100 per month.

• Start making their repayments early. Buying a house is expensive so most people could use at least one year to adjust, but if this couple were to commence repayments in year two instead of year five they would be able extend their repayment period to 18 years, which would reduce their monthly obligation by another $100.

First time home buyers who are less concerned about monthly payments may be more excited by the opportunity to generate a sizeable tax deduction for themselves by transferring savings held in say a TFSA or HISA and contributing them to their RRSP with the intention of drawing them back out later under the Home Buyers’ Plan. These folks will need to be mindful of the 90 day rule that stipulates RRSP contributions must be made at least 90 days prior to withdrawal in order to qualify under the HBP. In other words this is not a strategy that can be executed on the fly. It’s worth noting here that FHSAs do not have minimum holding periods and do allow immediate withdrawals of contributions.

In spite of these announcements, if you’re in the early stages of building up your down payment you’re still probably better off opening a First Home Savings Account and maxing out your eligible contributions there before going the route of the RRSP. As a reminder, you can contribute up to $8,000 per year for 5 years to a maximum total of $40,000.

While these new measures might help to make housing feel more affordable it’s possible that the benefits could be short-term in nature, as any measures intended to increase demand can also cause prices to rise. Time will tell whether there will be a corresponding increase in housing supply that will help to mitigate these effects.

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