TAX STRATEGY: A LARGE DOWN PAYMENT HELPS FIRST-TIME HOMEBUYERS

How to allocate funds for the purchase of a first home...

Q: My wife and I are looking at buying a house in the $275,000 range within eight months and wondering what would be an appropriate down payment. I have $80,000 and my wife has an additional $20,000 in cash, both earning very little in the bank. Borrowing more rather than less would seem to be the way to go, with interest rates so low. What do you suggest?

A: Any time you can put down 20 per cent or more of the purchase price, you’re giving yourself a significant head start on the home ownership front, and you’d be in that range with a $55,000 deposit. At that level, the rate you’ll be charged for Canada Mortgage and Housing Corp. (CMHC) mortgage loan insurance is about half what someone putting down 10 per cent will pay. Houses usually cost more than most rookie homebuyers foresee, so it’s not a bad idea to leave yourself a bit of a financial cushion, especially at first, so you can get a feel for what your annual housing costs truly are. If you’re managing easily, then you could use some of the reserve cash for a paydown payment on the anniversary date of the mortgage. If you’ve got RRSPs and haven’t owned a home before, you and your wife could each borrow up to $25,000 apiece from the plans for the down payment under the RRSP Homebuyers’ Plan. You’d have up to 15 years to repay that money. In that scenario, you could boost your outlay to $100,000 by drawing $50,000 from your accumulated savings, leaving you with a low-interest mortgage in the $175,000 range and sizable cash reserves that you might consider parking in tax-free savings accounts (TFSAs).