Real Estate Market

Home buyers: How large should your down payment be?

When you buy a house or a condo, there are minimum down payment requirements to consider as you make your financial arrangements. If the purchase price is $500,000 or less, you need a 5% down payment. For properties between $500,000 and $999,999, there is a 5% minimum on the first $500,000 and 10% on the remainder. For properties worth $1 million or more, you need a 20% down payment. 

 

If you are buying a property with the intention to rent it out to tenants, you need a 20% down payment regardless of purchase price. 

Borrowers who are self-employed or who have poor credit may require a down payment that’s larger than the minimum. 

For those purchasing with a down payment of less than 20%, Canada Mortgage and Housing Corporation (CMHC) mortgage default insurance is required, in order to protect the lender from the higher potential for default in a high-ratio mortgage. The premium (the amount you pay) for this insurance ranges from 2.8% to 4% of the total mortgage. Premiums in Saskatchewan, Ontario and Quebec are subject to provincial sales tax as well. The premium is rolled into your mortgage amount.

If you can put together a 20% down payment, you’ll save that CMHC insurance premium, as well as the interest you’ll pay on that premium over the life of your mortgage. However, for some aspiring home buyers, saving 20% could take many years to achieve—and it’s not required, unless they are required to in order to buy a home valued at $1 million-plus, or to buy a rental property. Purchasing with less than 20% down could make financial sense, especially for buyers who expect to live in their home for five or more years, who are borrowing less than what they are approved to borrow, or who live in neighbourhoods with high rents. 

If someone needs to put all their savings into a down payment to qualify for a mortgage on a home, this is a potential yellow flag. Buying under these conditions could leave them with no emergency fund for unexpected home repairs or just life’s everyday surprises. Putting all of their savings into a down payment also increases the likelihood they will not be able to save each month after making their mortgage payments, paying other home ownership costs and covering other their basic living expenses. 

However, if you have enough savings to buy a home with a down payment larger than 20%, you might qualify for a home equity line of credit that can act as an emergency fund. 

If a home buyer is questioning whether it’s best to leave some of their savings invested instead of putting down a larger down payment, especially if they have more than 20% down, the answer is—it depends. 

Using the Home Buyers’ Plan

A first-time home buyer may be able to take up to a $35,000 Registered Retirement Savings Plan (RRSP) withdrawal under the Canadian federal Home Buyers’ Plan (HBP). A first-time home buyer is someone who has not occupied a home that they owned, or one that their current spouse or common-law partner owned, for the four years prior to the home purchase. That four-year period begins on January 1 of the fourth year prior to the year the RRSP withdrawal is taken. 

 

Whether using the HBP is advantageous or not is difficult to calculate. A home buyer who does use it is losing tax-deferred growth inside their RRSP; how much depends on the return their investments may have otherwise generaated. RRSP withdrawals are eventually taxable on withdrawal, no later than age 72, and future tax implications may be difficult to determine. If an HBP withdrawal allows a home buyer to get into a home of their own or reduce or avoid CMHC insurance premiums, a withdrawal can be worth considering. 

Should you take money from your TFSA to buy a home?

If a home buyer has a tax-free savings account (TFSA), the decision about whether to use the TFSA to put down a larger down payment depends in part on the expected TFSA return. Over the long run, the stock market may return 6% to 7% before fees. If someone pays 1% to 2% in investment fees, an all-stock portfolio may generate 4% to 6% per year. If an investor is conservative and holds cash, bonds or other fixed-income investments, their return expectation may be lower. Consider that current mortgage rates are in the 2% range; some conservative investors may not earn much more than 2%, making it likely worthwhile for them to put their TFSA funds toward their home purchases. However, as interest rates rise, the potential to earn more on a TFSA may make staying put inside the investment account a better deal than putting those funds toward a mortgage. 

Even if the rate of return is similar to a borrower’s interest rate, a TFSA can also serve as a potential emergency fund. 

Tapping non-registered investments for your down payment

If a home buyer has non-registered savings, the rate of return required to justify keeping the funds invested instead of putting down a larger down payment becomes higher. This is because, unlike TFSAs, non-registered investments are taxable, with interest, dividends and realized capital gains reported on an investor’s tax return. An investor may need to earn a 3% to 4% preturn just to break even if their mortgage rate is 2% (depending on their tax rate and the type of investment income). As rates rise, so too does the required return. 

An homebuyer with non-registered investments can tilt things in their favour by making their debt tax-deductible: They may be able to use their non-registered savings to put down a larger down payment and then borrow back to replenish their investment account. This will generally allow them to deduct the interest on the borrowed funds used for investment. Their required return to break even may then be comparable to their mortgage rate. But, again, as rates rise, the potential return delta may become smaller. If mortgage rates rise to 4% and their investment returns are 5%, the $1,000 of profit per $100,000 of leverage may not be worth the risk and complexity.

Keep in mind that interest on money borrowed to invest in RRSP or TFSA accounts is not tax deductible—only money used for non-registered investment accounts.

Putting down a large down payment is a good thing. It means you have a stronger balance sheet, less debt and less risk as rates rise. You may also be able to avoid CMHC insurance premiums if you put more than 20% down. Keeping money invested instead of using it for a down payment may or may not help you come out ahead. A priority with any real estate purchase should be to make sure you still have room in your budget for emergencies and, most importantly, to save for the future. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

 

Federal government will pay up to $5,000 if you make your home more energy efficient

 

The government of Canada is launching a new program today that offers Canadians grants of up to $5,000 to pay for energy-saving home upgrades.

Prime Minister Justin Trudeau and Natural Resources Minister Seamus O'Regan rolled out the Canada Greener Homes Grants program today — worth about $2.6 billion over seven years — to help homeowners upgrade heaters, install solar panels and replace windows and doors.

 

"As a country, every effort counts to keep our air clean and our environment healthy," Trudeau said Thursday. "We know that these retrofits can sometimes be out of reach, so our government is now making them more affordable for Canadians."

Homeowners will be able to receive grants of up to $5,000 to make energy efficient retrofits to their primary residences, and up to $600 to help with the cost of home energy evaluations.

Trudeau said the grants will help 700,000 homeowners lower their bills and keep their houses warmer in the winter. 

People across the country are able to apply online starting today (the government says the landing page for applications was down earlier today due to high demand). An application starts with an energy evaluation by a certified adviser. That adviser visits an applicant's home and determines which energy-saving measures would qualify for reimbursement.

If the homeowner chooses to proceed, a licensed contractor would then be hired to conduct the retrofits. After an inspection of the completed work, the homeowner would be reimbursed.

It's estimated that private homes and buildings are among the largest sources of carbon emissions in Canada, contributing about 18 per cent of the country's emissions.

Last week, the federal government announced it's providing up to $10 million to recruit, train and mentor 2,000 people to conduct energy audits.

WATCH | Prime minister unveils $2.6 billion home retrofit program

 
 

Inspecting Grounding and Bonding at Residential Swimming Pools

According to InterNACHI’s Home Inspection Standards of Practice, an inspector is not required to inspect swimming pools or spas. However, learning the basic components and functions of residential pools, with a concentration on permanent in-ground pools, will help inspectors recognize defects in their condition and installation. One important aspect with regard to electrical safety is the proper grounding and bonding of the electrical and metal equipment of swimming pools and spas. 
  
Safety First  
It is important to remember that water and electricity don’t mix. Home inspectors should advise homeowners to consult or hire an electrician instead of doing any electrical work themselves. Always proceed with caution, and use personal protection equipment. Be aware of your surroundings when performing an inspection, especially when there are electrical components and water in close proximity to each other.
Never grab wires or components without disconnecting them from their power source. Wear rubber-soled shoes and rubber gloves. Don’t stand in water when working with or inspecting electrical equipment. Be sure to identify all circuits that are related to the pool equipment. When inspecting the pool or spa, check for unfinished or poor workmanship, particularly with the electrical components, wiring and installation. 
If conducting a visual-only inspection, stick to using your eyes only and not your hands. Don’t open anything that is not required to be opened, especially electrical components, boxes and panels. 
Check grounding wire connections, loose wires and conduits, and water leaks. Remember that water is an effective conductor of electricity. If there is an electrical problem with the pool equipment, a fault could occur and charge the entire pool or spa, making it fatally hazardous.

Grounding
The electrical equipment for swimming pools must be grounded and connected by wiring methods in accordance with the NFPA 70 National Electric Code® (NEC®).  
The following must be grounded: 
  • all electrical equipment associated with the circulation system; 
  • all electrical equipment located within 5 feet of the inside wall of the pool water; 
  • all through-wall lighting assemblies and underwater luminaires; 
  • panelboards that supply electricity to equipment associated with the pool; 
  • GFCIs
  • transformer and power supply enclosures; 
  • junction boxes; and 
  • pool motors. 
Grounding and bonding terminals should be identified as being used for wet and corrosive environments. Grounding and bonding connections should be made of copper, copper alloy, or stainless steel. They also should be listed for direct burial.  
Luminaries and related equipment should also be grounded. All lighting assemblies and luminaires must be connected to an insulated copper grounding conductor not smaller than 12 AWG. Where a non-metallic conduit is installed, the installation of an 8 AWG insulated copper bonding jumper may be required in the conduit. Wet-niche luminaires supplied by a flexible cord must have all exposed non-current-carrying metal parts grounded.  
An equipment-grounding conductor should be installed with the feeder conductors between the grounding terminal of the pool equipment panelboard and the grounding terminal of the applicable service equipment. 

Bonding 
Bonding is required to get all metal parts of the electrical equipment and the non-electrical metal parts of the pool/spa structure to attain equal electrical potential. Bonding of metal parts of the electrical equipment makes a low-impedance path for the fault current back to the source circuit to trip the over-current device. For equipment grounding, a separate insulated copper grounding conductor should be run to the equipment grounding terminal in the main service panel. Sheet metal screws must not be used to connect bonding conductors. 
The following parts of pools, spas, and hot tubs must be bonded together using conductors at least 8 AWG, or using rigid metal conduit, including:  
  • conductive pool shells, including poured concrete, sprayed concrete, and concrete block with painted or plastered coatings; 
  • structural reinforcing steel; 
  • copper conductor grid; 
  • perimeter surfaces that extend 3 feet horizontally beyond the inside walls of the pool, spa, or hot tub. A perimeter surface that extends less than 3 feet and is separated from the pool by a barrier shall require equipotential bonding on the pool side of the barrier. Bonding to perimeter surfaces shall be provided and be attached to the pool, spa, and hot tub reinforcing steel or copper conductor grid at a minimum of four points around the pool, spa, or hot tub. There are some exceptions; 
  • metallic components;   
  • underwater lighting; 
  • metal fittings; 
  • electrical equipment; and 
  • all fixed metal parts. 
Bonding is joining metallic parts to form an electrically conductive path that will result in electrical continuity between components to ensure that the electrical potential will be the same throughout. This is referred to as equipotential bonding. Keeping the electrical potential at the same level reduces the hazard created by stray currents in the pool or in the ground around the pool. Connecting (or bonding) everything metallic in and around the pool will help eliminate voltage gradients (or differences in electrical potential) from one part of the pool to another, and from metallic equipment to the pool water.   
The following is a general list of the items that require equipotential bonding: 
  • all metallic parts of the pool and spa; 
  • reinforcement metal of the pool, spa, coping, shell, framing, etc.; 
  • shells and mounting brackets of no-niche luminaires; 
  • all metal fittings; 
  • metal parts of the equipment; 
  • electrical devices and controls; 
  • metal cables and raceways, metal piping, and all metal parts; and 
  • water heaters rated at more than 50 amperes. 
     
The bonding conductor should be at least 8 AWG or larger solid copper.  


Bonded Parts 
All metallic parts of the pool's structure, including reinforcing metal, must be bonded together using solid copper conductors (insulated, covered or bare), and at least 8 AWG, or with rigid metal conduit of brass or other corrosion-resistant metal. Connections of bonded parts must be made in accordance with the NEC® (refer to Section 250.8).  
All underwater metal-formed lighting shells must be bonded, as well as all metal fittings within or attached to the pool structure. Metal parts of electrical equipment related to the water circulation system – including pumps, motors, metal parts of pool covers and associated equipment – must be bonded. All fixed metal parts must be bonded, including metal-sheathed cables and raceways, metal piping, metal awnings, metal fences, metal doors, and metal window frames. 
Pool Shells 
Bonding to the conductive pool shells is required. Poured concrete, sprayed concrete, and concrete block with coatings must be considered conductive materials.  
The un-encapsulated structural reinforcing steel must be bonded together by tie wires. Encapsulated structural reinforcing steel must be installed with a 12x12-inch copper conductor grid. The grid must be constructed of minimum 8 AWG bare solid copper conductors bonded to each other at all points of crossing, and the grid must conform to the pool's shape, as well as be secured within or under the pool no greater than 6 inches from the outer contour of the pool's shell.  
Perimeter Surfaces 
The perimeter surface that is considered to be bonded is the area that extends 3 feet horizontally beyond the inside walls of the pool, and includes the unpaved surfaces and other types of paving. Bonding to perimeter surfaces can be attached to the pool reinforcing steel or copper conductor grid at a minimum of 4 points spaced around the pool's perimeter. 
Summary 
The electrical equipment for swimming pools must be grounded and connected by wiring methods in accordance with the NFPA 70 National Electric Code®. In addition to grounding, bonding is required to get all metal parts of the electrical equipment and the non-electrical metal parts of the pool/spa structure to attain equal electrical potential. Because the combination of water and electricity can be fatal, it is important to remember and adhere to all safety concerns and practices. Home inspectors should advise homeowners to consult or hire an electrician instead of doing any electrical work themselves.
 

What will happen to Bank of Canada rates in 2021?

The Bank of Canada will likely leave the overnight lending rate unchanged for the whole of 2021, according to a recent Ratehub.ca forecast.

James Laird, co-founder of Ratehub.ca, said that even with the continuous roll-out of COVID-19 vaccines, full economic recovery might take a considerable amount of time.

“The bank will be patient in raising rates until pre-pandemic economic indicators are achieved,” Laird said. “Therefore, the prime lending rate for variable rate mortgages and HELOCs will remain unchanged.”

This reluctance to rock the boat will also be apparent in the lack of changes to mortgage regulations this year, Laird added.

“The government and regulators are focused on the pandemic recovery; therefore, they will not introduce any new rules which would make it any harder for homebuyers to qualify for a mortgage,” Laird said.

Intensified borrowing and sales activity will likely stimulate growth of 4% to 7% in average real estate prices, “with the strongest growth in the suburbs around major urban centres,” Laird said. “With Canadians working from home, the demand will continue to be strong for more space. Larger homes outside of the city centre will see the strongest demand.”

The condo sector will be the notable exception to these trends, with prices in downtown markets expected to slightly decline in the first half of the year.

“University students learning remotely, the lack of immigration, and the crack down on Airbnb, will continue to weigh on condo prices,” Laird said.

The asset class might find a measure of stability by the end of the second quarter, however.

“When students return to campus and borders reopen for new Canadians, demand will return to the condo market,” Laird said. “With home values surging, condominiums will be the only option for priced out first-time homebuyers.”

Can the housing market stay hot for the rest of 2021?

 

Immigration, the prospect of further government regulation, and Bank of Canada rate announcements will be some of the most significant factors in determining whether house prices in Canada continue their barnstorming upward trajectory in the second half of 2021, according to a prominent industry executive.

James Laird (pictured), co-CEO at CanWise Financial, told Mortgage Broker News that while the recent stress test increase would apply some downward pressure on the housing market, it could be offset to some degree by a return to regular levels of immigration in the coming months.

“Immigration’s a huge factor,” he said. “Many of the new Canadians who come here bring wealth with them, and high on their priority list is purchasing a home. That would add a bunch of new people to the pool of buyers.

“The net effect probably depends on how many people arrive and when, and their demographic from an income and wealth perspective. But the wealthier they are, the more they will be able to buy a home immediately as opposed to waiting a few years, getting settled and then purchasing a home.”

Read more: What will happen when Canada reopens?

Last week, federal finance minister Chrystia Freeland described the “recent and rapid rise in housing prices” as a development that threatened the stability of the market as she announced a hike in the minimum qualifying rate for insured mortgages in line with their uninsured counterparts.

Laird said his feeling was that the red-hot market activity from the opening months of the year had already cooled somewhat, a factor that could heavily influence whether the federal government decides to intervene further during the remainder of 2021.  

“It does feel as though the heat of the market from the early part of the year has dissipated a little bit,” he said. “It’s still a strong market, but it’s not as wild as it was in the first few months of the year.

“If the market, at some point either this year or next year, gets too carried away, they will always reserve the right to implement more measures. It just depends on what the market does.”

Home sales in Canada hit an all-time record in March, with the 76,259 total representing an increase of over 75% on the same period in 2020. More significantly, the number of new listings more than doubled from the previous March, with over 105,000 new houses arriving on the market.

“As we got into March, the supply imbalance wasn’t as great as it was in the prior month,” Laird said. “That’s why we had record transactions across the country – there was strong demand, but also strong supply. Getting a little bit closer to equilibrium from a supply and demand perspective caused home price appreciation to slow off the ridiculous pace that it had been on.”

Laird said that the slowdown in month-over-month housing price increases was in some way inevitable in the current climate.  “At some point you naturally start to exhaust the pool of buyers who were looking to purchase this year,” he pointed out.

Read more: Former BoC governor Dodge on the unpredictability of Canada’s economic recovery

With the Bank of Canada’s last announcement on its overnight rate revealing that it had moved forward the date at which it expected to meet its inflation target – from 2023 to 2022 – much attention will be focused on its next statement, scheduled to land on June 09.

Laird said that while back-to-back revisions of its forecast were highly improbable, there was still a fair chance of the Bank changing those projections at some point in the coming months. “A key figure to look at in the next announcement is the direction the unemployment market is going,” he noted.

“The last announcement was filled with positive signs of the recovery across the board with one exception – slack in the labour market. That’s going to be a really important variable to keep an eye on as we try to figure out what the Bank of Canada’s policy will be going forward.”