Incentives & Tax Breaks First Time Buyers Should Know About

01/27/23

Is buying a house in Toronto one of your goals for the upcoming year? If so, it’s hard to imagine a more exciting milestone! Not only will you have made an excellent investment in your financial future, but you’ll have a place of your own in one of Canada’s top cities. As thrilling as the idea may be, a great deal of planning is needed to make it happen.

While the cost of homeownership in Toronto is above average, both the federal and provincial governments have several incentives in place to help first-time buyers achieve their goals. In this article, we’ll take a deep dive into these programs, what they mean, and how to qualify for them.

Table of Contents

What Stops First-Time Buyers?
The First-Time Home Buyer's Incentive
Home Buyer's Plan
Land Transfer Tax Refund for First-Time Buyers
First-Time Home Buyer's Tax Credit

What Stops First-Time Buyers?

First, let’s consider what stops people from buying their first home. For many, the biggest deterrent is the ability to come up with a down payment. On any property over $1 million, you need at least 20%, or $200,000 upfront. At that amount, it’s easy to see why so many people have put off buying a house!

However, coming up with that down payment is much easier now that housing prices are down. The moment a property drops below the $1 million mark, the rules change, and you need less upfront for your purchase. Here’s how it works:

The required down payment is now 5% of the first $500,000, which works out to $25,000. Then, you need 10% of the remaining amount.

For example, imagine buying a $700,000 condo. You need $25,000 on the first $500,000. The remainder works out to $200,000, of which you need 10%, or $20,000.

When all is said and done, your down payment becomes more accessible at $45,000 ($25,000 + $20,000). And by taking advantage of government incentives, buying your first house becomes even easier.

The more information you have before buying your first house, the better prepared you’ll be. Here are some other posts you may find useful:

The First-Time Home Buyer’s Incentive

Under this plan, the federal government puts up as much as 5% of your down payment on a resale property. If you decide to buy a new build, they will pay as much as 10% towards your purchase. Of course, there is a catch. The government is not giving away money for the sake of being generous.

Participating in the First Time Home Buyer’s Incentive gives them part ownership in your home. Eventually, you will have to repay the original amount of the loan plus a maximum of 8% of the increase in the property value per year.

If the house drops in value, you will repay the principal minus a maximum of 8% of the loss.

To qualify for this program in Toronto, you must:

Have a qualifying income of no more than $150,000.
Your loan cannot be more than 4.5 times your qualifying income, which works out to a maximum of $675,000. As you can imagine, this stipulation limits your purchasing options, unless you have significant funds for a down payment.
You must be a Canadian citizen or a permanent resident.
The home must be your primary residence and not an investment property.

Finding the right home that fits all these guidelines can be challenging. However, it’s worth the search because this incentive can significantly lower the barrier to entry of buying your new home. In addition, by having more funds for your down payment, your monthly carrying costs will also be lower.

Home Buyer’s Plan

Have you been diligently saving money into a registered retirement savings plan (RRSP)? If so, you may already have access to a down payment or at least a significant part of it. Under the Home Buyer’s Plan, you can withdraw as much as $35,000 to put toward your purchase. As long as you repay this amount within 15 years, there will be no tax penalty.

How do you qualify for this program?

You must be a Canadian citizen or resident.
You must have a written agreement to purchase a qualifying home.
The home must be your primary residence.
You have not lived in a home you or a partner owned for four years or more.

If you’re buying a home with a partner who is also a first-time buyer, this plan gets even better. Both of you can apply, which means you can pull a total of $70,000 as your down payment.

So many neighbourhoods, so many choices! How do you decide on the location for your first home in Toronto? A few of our community posts might help. You’ll find them all right here.

Land Transfer Tax Refund for First-Time Buyers

Aside from the down payment, the provincial and municipal land transfer tax is another expense that makes buying a home challenging for first-time buyers. Unlike other closing costs, you cannot roll this tax into your mortgage, meaning you must have the funds upfront. Fortunately, first-time buyers can apply for both a municipal and provincial Land Transfer Tax Refund. Together, these can save you up to $8,475, making the barrier to entry much easier to overcome.

What do you need to plan a successful purchase? You’ll find a few helpful tools and resources below:

First-Time Home Buyer’s Tax Credit

Lastly, you can find some relief with the First Time Home Buyer’s Tax Credit. Under the new budget, this $10,000 credit could result in a $1,500 reduction in your total tax owing after purchasing a home. It may not seem like much, considering how much it costs to buy a house in Toronto. Still, an extra $1,500 could go a long way towards recouping your moving expenses or helping you decorate your brand-new home.

Ready to find your dream home in West Toronto? Our end-to-end buying services can help you reach your goals. Send us an email or call 416-769-6050 with any questions you have today.